European credit default swaps tightening lags cash market

Spread tightening continued across the European credit derivatives market this week, driven by increasingly positive sentiment towards credit risk. But traders noted that credit default swap spread tightening lagged the cash market.

This tightening differential has created a modest ‘default basis’ – the difference between the credit default swap spreads and the bond asset swap spread. “There’s a lot more interest in cash now than in credit default swaps,” said one London-based trader. “We are seeing some basis widening here, but the default basis is still at a relatively low level compared with the past year.”

Bank of America research noted the same trend in the US credit markets, as trading resumed following the festive