Interpreting CDS–Bond Basis as Implied Funding
Summary
The document asks how to infer a bond’s funding or repo rate from its CDS–bond asset-swap basis, including how to account for a bond trading above par. It mentions the C-spread as a possible adjustment for default probability but provides no calculation method or references that resolve the question.
The answer illustrates why basis may reflect bond-specific financing conditions. During the Brazilian sovereign debt scare described, heavy demand to short a benchmark bond made it special, with a reported financing rate of zero despite its high yield. The account attributes this scarcity to market positioning and expectations around the election, rather than to the size or movement of the credit spread. It suggests that CDS may now offer an easier way to express views on risky debt, potentially weakening the connection between bond financing and CDS basis. This is a historical anecdote, not a general pricing formula or evidence for a particular par adjustment; it does not answer how to calculate the implied rate.
Key ideas
- A CDS–bond basis may include a component arising from the bond’s implied financing rate.
- Bond scarcity and short demand can make financing unusually favorable to bond holders.
- The Brazil example links specialness to market positioning and election-related expectations rather than credit spread levels.
- The answer offers no formula for implied funding or for adjusting a premium bond toward par.
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Full text
# Implied funding/repo rates from Credit Default Swaps # Implied funding/repo rates from Credit Default Swaps One of the differences between a CDS and a bond is the funded vs unfounded nature of the two. Given that is the case, at least some portion of the CDS-Bond basis should be driven by an implied repo/funding rate for the bond. My question is the following: - What are some approaches to calculating the implied funding rate using the CDS - Bond ASW basis? - In the case of a bond trading at a premium, how do we think about “par-adjusting” the bond when we calculate the basis? I have seen some papers mention something called the C-Spread, which adjusts the basis by the probability of default from bond/cds markets. Are there any good papers on either of these. The goal is to arrive at a decent approximation...not necessarily something especially rigorous. ## Answer by Dimitri Vulis (score 1) https://quant.stackexchange.com/a/61155 I recall that in 2002, when Lula won the Brazilian presidential election, and was later inaugurated, most of the market participants assumed that Brazil would default on its sovereign debt, as Argentina did in December 2001. (I took the opposite view and did well for myself.) We used to quote CDS as par spreads back then - was was way over 6,000 bps (today we quote upfronts). Brazil sovereign hard-currency bonds were trading special of course. So many people wanted to short their benchmark bond (called "C bond") that its financing rate was 0! (But its yield was over 50%). You could borrow money for free if you were willing to be long it, while everyone else wanted to short it. In this example, Brazil sovereign hard-currency bonds were trading special because many more people than usual wanted to short them - not because the credit spread was wide, not becase it widened, but because the presidential election was not expected (and misinterpreted) by the market. But I think these days people are much less likely to short risky/distressed bonds than they were in 2002. It's easier to take the same view using CDS now. I'd expect even less connecton than there was 20 years ago.
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