Barcap suggests high yield positive basis package

In a recent research article Barclays Capital suggests a positive basis package to take advantage of the wide credit default swap spreads of many high yield index constituents compared to their cash bonds.

The bank points out that the high yield CDX index has recently traded as much as 3.5 points wider than its intrinsic value – the sum of its individual constituents’ credit default swaps. As a result, traders have sold protection on the index and bought protection on the individual high yield names, pushing out the single name credit default swap spreads compared to the cash market.

To benefit from this positive basis, Barclays suggests shorting a package of Freescale 8.875% bonds, Boyd Gaming’s 6.75s and the 8.875% notes from Community Health, combined with selling credit default swap protection on the three names. The basis package has positive convexity, benefiting from both spread improvement and an issuer default.