Buy the negative basis, says Goldman Sachs

With structural changes to the credit default swap market pending, Goldman Sachs expects CDS spreads to be driven wider and closer to bonds over the coming months. As a result, the negative CDS-bond basis is anticipated to narrow.

In their Friday (13 February) research piece, Goldman credit strategists recommend buying the negative basis, especially a basket of investment grade bonds trading at large negative basis levels. First, CDS protection will be more reliable for buyers as counterparty risk is reduced. Second, protection sellers will be discouraged from taking aggressive, long leveraged positions due to higher leverage and higher financing costs. CDS spreads should gradually converge on bonds, says Goldman.

Goldman's IG negative basis basket, calculated using CDS spreads and bond OAS