Markit Credit Research

31/05/2013

Markit CDS-bond basis - May 2013

Volatile basis during May, driven by CDS Bonds have outperformed Shift towards positive basis in Europe and North America
We remarked in last months report that the conditions were set for CDS spread volatility, and so it has proved. Concerns about the unintended effects of monetary policy experiments have rocked risk assets in recent weeks, with CDS spreads widening sharply. Bond spreads, on the other hand, have been more resilient, and continued to tighten throughout May. This has driven the basis in a positive direction, and only a handful of credits now have a negative basis.

Markit iTraxx Europe

The trend towards positive CDS-bond basis in Europe has resumed in May after a brief hiatus in April. Bonds have outperformed CDS, the latter asset class showing considerable volatility in recent weeks. This has affected the basis, as bond asset swap spreads continued to tighten steadily over the month. North American credits also saw the basis shift in a positive direction, though the majority of names still have a negative basis.

Positive basis credits

Credits with the highest positive CDS-bond basis (ranked by basis)
Name Assicurazioni Generali SpA Societe Generale Cr Agricole SA Aegon N.V. Royal Bk of Scotland Pub Ltd Co UniCredit SpA ALSTOM Holcim Ltd Barclays Bk plc Commerzbank AG ASW 61 46 54 58 61 188 74 21 43 72 CDS 224 166 165 165 163 284 166 111 131 160 Basis 162 119 112 107 102 95 93 90 88 88 Basis Change 3 12 10 1 8 1 Tate & Lyle PLC 19 Compass Gp PLC 3 Reed Elsevier PLC 10 Centrica plc 6 60 49 -11 4 70 57 -13 13 79 52 -27 1 104 59 -45 2 Name Next plc ASW 121 CDS 69 Basis -52 Basis Change -10

Fig. 1 European basis moves in a positive direction Figure 1 shows that the Markit iTraxx Europe is now trading wider than the Markit iBoxx Corporates (3-5 year maturity), a reversal of the usual relationship.

Negative basis credits

Credits with the highest negative CDS-bond basis (ranked by basis)

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Basis becoming more positive

Top 10 credits where CDS-bond basis changed by a positive amount
Name Anglo Amern plc ING Bk N V Wolters Kluwer N V PostNL NV Credit Suisse Gp Ltd Brit Amern Tob plc Telekom Austria AG ALSTOM Veolia Environnement Koninklijke KPN N V ASW 73 56 65 180 39 23 70 74 50 91 CDS 155 135 80 243 103 45 127 166 123 147 Basis 82 79 15 63 65 22 57 93 73 56 Basis Change 35 26 25 24 23 22 20 19 18 18

Markit CDX NA IG

Fig. 2 Bullish sentiment on Hewlett-Packard has driven CDS spreads tighter and the basis into negative territory

Basis becoming more negative

Name Marks & Spencer p l c Next plc Telefonica S A Solvay SA LLOYDS TSB BK PLC AXA Carrefour BOUYGUES Fortum Oyj PPR ASW 168 121 133 47 63 76 55 50 49 45 CDS 170 69 181 94 143 141 94 111 55 77 Basis 2 -52 48 47 79 65 39 62 6 33 Basis Change -13 -10 -9

Positive basis credits

Name Alcoa Inc. Berkshire Hathaway Inc Gen Elec Cap Corp -8 Wal Mart Stores Inc -8 Anadarko Pete Corp -6 -4 -2 -1 -1 Simon Ppty Gp L P 51 53 2 1 HARTFORD FINL SERVICES GROUP INC Bristol Myers Squibb Co 87 99 92 103 5 4 2 -4 14 30 16 -1 ASW 201 49 62 CDS 260 81 88 Basis 59 32 26 Basis Change 75 4 2

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31/05/13

Markit Credit Research

Basis becoming more positive

Name ASW 201 160 26 164 181 220 64 47 64 323 CDS 260 138 14 23 149 151 35 14 37 299 Basis 59 -22 -12 -141 -31 -69 -29 -33 -27 -24 Basis Change 75 37 25 21 20 19 17 16 14 12

Negative basis credits

Name Ingersoll Rand Co Marsh & Mclennan Cos Inc EXPEDIA INC Southwest Airls Co MeadWestvaco Corp Macy s Inc Cap One Bk USA Natl Assn CBS Corp News America Inc Hillshire Brands Co ASW 164 130 220 164 170 141 108 128 85 140 CDS 23 45 151 96 102 77 45 67 30 93 Basis -141 -86 -69 -68 -68 -63 -63 -61 -55 -47 Basis Change 21 3 19

Alcoa Inc. Arrow Electrs Inc Boeing Cap Corp Ingersoll Rand Co Computer Sciences Corp EXPEDIA INC Cox Comms Inc -7 Goodrich Corp 7 -25 4 -6 1 -2 Name Macy s Inc Hewlett Packard Co DIRECTV Hldgs LLC Halliburton Co Nabors Inds Inc Southwest Airls Co CBS Corp Amern Express Co ConocoPhillips Duke Energy Carolinas LLC Northrop Grumman Corp Dell Inc

Basis becoming more negative

ASW 141 149 104 41 185 164 128 72 43 56 CDS 77 139 94 39 145 96 67 48 30 17 Basis -63 -10 -9 -2 -40 -68 -61 -25 -13 -40 Basis Change -25 -14 -9 -7 -7 -7 -6 -5 -5 -5

31/05/13

Markit Credit Research

Gavan Nolan
Credit Analyst Markit Tel: +44 20 7260 2232 Email: gavan.nolan@markit.com For further information, please visit www.markit.com

31/05/13