As a result of weak pricing of new U.S. corporate debt, negative basis trades, perceived by many as relatively risk-free money, have recorded holding losses. The so-called negative basis trades involve the buying of a corporate bond and also protection on the credit with CDS. These trades were among the most popular trades earlier this year because it generates income while hedging out the risk of a corporate default.


The basis is the difference between the spreads of a corporate bond and a credit default swap. When the swap spread is trading tighter than the bond spread, the basis is considered negative. In addition to the premium earned from holding the position, the trades also benefit when corporate bonds outperform comparable derivatives, turning the basis back to positive, which is considered the more normal relationship. However, instead of returning to positive -- as many had expected -- weak pricing of corporate debt sales has turned the basis more sharply negative, leading holders of the positions, including hedge funds and bank trading desks, to record mark-to-market losses.

 

 

We don’t have a traditional strategy process, planning process like you’d find in traditional technical companies. It allows Google to innovate very, very quickly, which I think is a real strength of the company.