Analysts at Credit Derivatives Research say there is an opportunity to trade the breakdown in the relationship between equity correlation and some of the top five names in the IG index. The implied tail risk of the CDX indices plummeted recently as MBIA and Radian worked towards a recapitalisation. But there was not much of a drop in the equity upfront payment.

Ever since the Bear Stearns bailout, the equity tranche has not traded in line with the five riskiest credits in the index. The analysts say that before and after the Bear Stearns bail out the relationship of the average spread of the five widest credits and the equity upfront payment has broken down. Thus, they say a way to play this scenario is to actively trade a basket of credits against the equity tranche. If Radian and MBIA blow out again, they recommend selling protection on both and buying equity tranche protection as a hedge.