Credit Default Swaps (CDS) vs Bond Credit Spreadsa visual exploration through the Blogosphere Gaetan Lion March 21, 2012
CDS vs Bond Credit SpreadYou would think both those metrics shouldclosely track each other since they trackthe same thing: credit risk.Apparently there are many reasons whythe two can differ due to relativedifferences between the two in liquidity,funding complexity, market structure, andcounterparty risk among other factors.
PIGS countriesAs shown the Bond Spread seem to actually lead (increase higher, earlier)than the CDS in early 2009 in both Greece and Portugal and even Spain.
Morgan Stanley CDS vs Bond SpreadBetween 8/31 and 11/24/2011 the Bond Spread has been much higher than theCDS. For another time period, the reverse may have been observable.
Here Bond Spreads take the lead (remain high) in early 2009, to lagjust a bit in late 2009. By February 2010, there is very closeconvergence between the two.
As the title suggests, Italian bond spreads, after lagging in early 2010,take the lead in mid 2011 relative to CDS. The latter take a long time tocatch up and have not yet as of January 2012.
Here Spain CDS clearly lead bond spread for an entire year, until thetwo reach pretty good convergence by second half of 2010.
Except for a couple of quarters in 2009, Belgian CDS are chronicallyhigher than Belgian bond spreads.
ConclusionIn view of the visual evidence, it does notappear that CDS are chronically widerthan Bond Spreads or always lead BondSpreads in recognizing credit risk. Also,the volatility of both appears to be similar.Arbitrage opportunities between the twoappear fleeting and potentially dangerousas the basis difference can abruptly switchsigns.