Spreads vs volatility
The widening of spreads in cash bonds and credit default swaps has not been mirrored by an increase in implied volatility. Raja Visweswaran of Bank of America takes a closer look at the circumstances surrounding this decoupling
The first half of this year has swung from untrammelled optimism in February to the unbridled pessimism witnessed for two months since the middle of March. The correlation-led sell-off in the collateralised debt obligation space exacerbated matters, leaking through into the main credit indices in mid-May. That pessimism prompted investors to visit synthetic credit markets more than their cash cousins, as shown by the chart above, which highlights the performance of the main iBoxx cash bond index
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