July 2007 marked the time when the 'basis' broke range. It has since turned negative, and has not recovered from year-end peaks. Regime changes are difficult because they are hard to anticipate, accept and reposition around. As trading over the past year has shown, bonds are underperforming credit default swaps in the bear market. This has left traders wondering how, or if, to trade basis.
Cash market funding is a universal factor driving the basis. Take the case of emerging market sovereign debt