Whoops, missed this.
Ireland joined Greece this week in the negative basis club. That is, the five-year asset swap spread for Ireland outpaced movement in equivalent credit default swaps. So (in basic terms) spreads in the CDS market were trading lower than in the cash market for Ireland.
You can see the shift in the below chart, from Bank of America Merrill Lynch.
The inversion happened on Wednesday, just after the clearing house LCH.Clearnet asked its members to start stumping up more cash to trade in Irish bonds.
From BofAML’s Max Leung and Alan Stewart:
We think it is interesting to note that the significant widening in Irish bond spreads was not followed by moves of similar magnitude in the CDS space, as the most direct impact of the LCH announcement is investors cutting their cash positions due to the increased funding costs. This can be visualized through the Irish 5y CDS-Bond basis, which became inverted on the Wednesday (i.e. 5y ASW wider than 5y CDS; Chart 5 [above]). The Portuguese basis also tightened, although to a lesser extent, but we would expect the inversion to take place if PGBs get the same treatment as IRISH on LCH.
That would tally with the FT’s report that LCH.Clearnet’s haircut-hikes sent Irish banks scrambling to sell government bonds to raise the additional cash needed to avoid the unwind of their repo transactions. Given that CDS didn’t move as sharply the margin move would have opened up plenty of opportunity for negative basis trades.
For those wondering, we hear the basis has moved back to around zero on the back of Friday’s joint resolution statement. Ireland CDS is down 60 basis points to about 535bps, according to Markit prices, in any case.
Related links:
The Grεεk nεgαtivε bαsis trαdε – FT Alphaville
Bond sell-off takes Ireland closer to tipping point - FT