As we hear from one government spokesperson after another that the Greek PSI deal is 'going well' which appears to us to be a misnomer as either its done or its not, we note that the price for the Greek CDS-Bond basis topped Par today for the first time. While there is some noise in this (and extremely wide bid-ask spreads), looking at the ask on the bonds and the bid on the CDS which measures more accurately the price at which basis traders can exit the trade (though liquidity is challenging), it would appear that some hedgies are ringing the bell on this trade and covering at better than Par levels. While we would have expected some basis traders to hold through the event horizon, it makes little sense to look a gift horse in the mouth as the trade has met its 'theoretical' limit (and beyond in fact as the add-ons from EFSF and GDP warrants leave some extra on the table). The point is that the basis (the price of buying a Greek bond and fully hedging its 'default' risk) has peaked, implying a credit event is 100% priced in suggesting CACs are on their way later today (despite current 'news' reports'). If the Greeks really have the needed participation then we would expect to see CDS dump tighter as everyone scrambled out - even to the 45% upf that some think 'new' CDS should trade at, this is not occurring.
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Source: Bloomberg and CMA
Today has seen prices for GGBs drop to record lows but at the same time costs for credit protection (bid and ask) have dropped modestly - strongly suggesting the marginal trader was a basis unwind as they sold their bonds and protection back to lock in gains. The 2037 bonds that we have used consistently for CTD are bid at EUR15.17 and offered at EUR25.5 (up from a 'normal EUR2-4 spread) while the CDS is 74.5%/76.5% upfront (anyone still wonder where the liquidity is in European sovereign credit markets?).
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