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Bond CDS Gap

The differential or spread that exists between credit derivatives (such as credit default swaps or CDSs) and their underlying cash bonds. This differential is also referred to as the basis:

Bond CDS gap = CDS price – cash bond price

Bond CDS gap = basis

If CDS price is higher than cash bond price, this means that CDSs are trading above cash bonds, and as such buying debt protection is costlier than usual. A positive basis consists of a short position in the cash bond altogether with short CDS protection (selling protection).

A negative gap results from a long position in the bond and a long credit protection position (buying protection).


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