Merrill pitches CDS baskets as alternative to risky single names

Instead of confining themselves to riskier individual corporate bonds, investors hunting yield can find relatively more value in basket credit derivatives, according to research by Merrill Lynch.

Investors can enhance their yield by taking on potentially more structural risk via first-to-default baskets (FTDBs), Chris French, London-based head of international credit research at Merrill Lynch told RiskNews.

The US bank pointed to names from the banking sector in the UK and Ireland as an area where investors could find particular value this year. For example, structures referenced to the senior debt of UK retail banks and building societies appear to be relatively unleveraged compared with most FTDBs.

In broad terms, yield tends to increase as basket default correlation decreases. “Many investors are accessing FTDB structures via credit-linked notes,” French said. “Though for shorter investment horizons, a swap is more sensible,” he added.