During the financial crisis, Pimco bought indexes of credit default swaps from other money managers who were hungry for protection against the rising tide of corporate defaults. They later reaped significant gains from these CDS indexes once the U.S. economy and banking system stabilized.
The strategy benefited from the negative basis, the difference between credit default swaps and the underlying bond. Usually, traders arbitrage away the difference between the two assets, so a negative basis serves as an indication that investors are placing a premium on the liquidity of a credit default index versus plain vanilla corporate bonds.
0 Comments