Distressed credit buyers should target CDS auctions, says Barcap

Barclays Capital recommends that distressed investors looking to amass large positions in defaulted credits should put in buy auctions at the credit derivative settlement auctions. According to the most recent issue of Barclays’ US credit alpha report, names that are widely held through negative basis trades – in which an investor buys bonds hedged with credit default swaps – will have an imbalance to sell bonds at the auction. This could depress the auction price and present a cheap opportunity to get long the credit.

On the other hand, names that are widely included in CSO reference portfolios could be bid up at auction, says the report. This is because the longer settlement time for most CSOs may lead dealer correlation desks to buy bonds at the auction.