Fixed Income Relative Value Analysis by Doug Huggins & Christian Schaller

Author:Doug Huggins & Christian Schaller
Format: epub
Publisher: John Wiley & Sons, Inc.
Published: 2013-05-02T04:00:00+00:00

The figure highlights the significant correlation (–0.80) between the two series over the period for which we have CDS data.

To see the extent to which the CDS rates help explain the cheapness of the 30Y bonds relative to swaps, we plot the LIBOR–repo spread along with an adjusted series for the 30Y swap spread in Figure 9.10. In particular, this adjusted 30Y spread increases the swap spread (richening the bonds relative to swaps) by adding the CDS rate to the swap spread.

FIGURE 9.10 LIBOR–repo spread and CDS-adjusted 30Y swap spread.

Source: Bloomberg.

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