Bond-CDS basis trades have 'stopped working', hedge funds say

The basis between some bonds and their accompanying credit default swaps are stuck at levels that would have provoked a feeding frenzy a few years ago, but hedge funds are sitting on the sidelines. Why?

Risky proposition: hedge funds are steering clear of CDS basis trades

It looks like a great trade – at least on paper. For the past couple of years, US high-yield bonds have been trading anywhere from 90 basis points to 170bp cheaper than credit default swaps (CDS) on the issuers, while the basis on investment-grade names has hovered between 30bp and 70bp.

The credit group at Goldman Sachs highlighted the mispricing in a research report published on June 2, highlighting "ample opportunities to exploit anomalies that exist in certain names."

Not so long ago, hedge

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