Basis (CDS-Bond)
Corporate Credit Analysis glossary · Ratings, Syndication & Market Dynamics
Definition
The difference between a credit default swap spread and the cash bond Z-spread for the same reference entity. A positive basis suggests CDS protection trades wider than the cash market; technical and structural factors drive the basis.
Basis (CDS-Bond) in plain English
There are two different ways to bet on whether a company will fail to pay its debts, and they should agree on the risk — but they often don't quite match. One way is buying the company's actual bond (lending it money); the other is buying a CDS, basically an insurance policy that pays you if the company defaults. The 'basis' is just the gap between the price of that insurance and the risk baked into the bond. A positive basis means the insurance costs more than the bond alone suggests it should — like when flood insurance is pricier than the flood risk of your house really warrants, because of quirks in how the two markets work rather than the actual danger changing.
Also called: CDS-Bond
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