TRENDS IN CREDIT BASIS SPREADS.

The article explores trends in credit basis spread in the U.S., focusing on the widening of spreads in credit market basis trades between the cash bond and credit-default swap (CDS) markets. It examines three possible sources of the prolonged dislocation between the cash bond and CDS, including increased idiosyncratic risk, strategic positioning in CDS products, and post-crisis regulatory changes. The trade mechanics of the CDS-bond basis trade is reviewed.