Greece debt volatility provides openings for basis trading

The ongoing volatility among peripheral European sovereigns has opened up a basis between credit derivatives and bonds that is large enough to drive a coach and horses through, with room to spare. In particular, there has been a massive bond sell-off at the short end of the Greek sovereign curve, exacerbated by the debate among European policymakers over the shape of Greece’s second bailout.

In contrast, levels in the credit default swap (CDS) market have remained relatively static, with the