Greek CDS… May 24, 2011 at 6:54 am
… typically trade under Old R restructuring. That fact could be become rather important soon. In Old R trades there is no limit on the maturity of the deliverable obligation, and no tranching in the auction post credit event. That in turn means the cheapest to deliver option may be quite valuable – there may be quite a large spread between short and long-dated bond prices post restructuring. Thus going into the event you can expect the CDS spread/bond spread relationship to be interesting. Everyone who entered into negative basis trades on Greece knew all this, right?
Update. Here are a few more links: more on negative basis trades on Greece and Barcap’s thoughts on how Greece will go (a soft restructuring which does not trigger CDS followed by a hard one a little while later that does).