Improving credit quality and decreasing spreads
Posted by admin on December 25th, 2009 | Comments Off
The factors that drive the widening and the tightening of the basis are explained below:
Factors that pull protection tighter (negative basis):
- Strong demand from protection sellers because of the unfunded nature of CDS and a lack of desired exposure/liquidity in the debt market.
- Synthetic CDOs can drive default swap spreads tighter because the manager needs to sell protection in order to buy synthetic credit risk into these structures.
- The existence of a default swap curve in 1, 3, 5 and 10 years can offer investors a broader range of maturities to construct a better portfolio.
- Assets trading above par, that is, the protection seller is exposed to a lower amount than the cash investor.
- Improving credit quality and decreasing spreads/basis volatility (CDS _ high beta instrument).
Welcome to my website! My name is Isabela Wane. I am a business consultant currently working for a major US company. I am also an author of several publications concerning payday loans and credits. On this website you can find my articles that dwell primarily on how to select a good payday loan and what things to avoid when taking a credit. I hope that you can all benefit from my knowledge.