Index Mania And the Growth of the CDS Markets

Abstract

The growth of CDS indices should allow creative investors to pit one market against the other, but only to the extent that those indices remain liquid. While there is a large and growing number of CDS indices, and more in the pipeline, the products most tied to CDO collateral are the North American and European corporate indices along with the ABX.HE index on sub-prime home equity loans and the CMBX.NA index on CMBS. The investment-grade indices, CDX.NA.IG and its European cousin, the iTraxx-IG series, are the most liquid and offer the most dynamic hedging, speculating, and investment opportunities. The CDX.NA.HY high-yield index offers a good example of an index that has fizzled. That index began as a fairly liquid index, offering dealers a means of hedging their pipelines, but many traders abandoned it when they discovered it often trades independently of the cash and single-name CDS markets, proving the point that customer flow is essential to the long-term success of a young index

TOPICS: CLOs, CDOs, and other structured credit, mutual fund performance, international