Bid-Ask Spread on the CDX IG: A Gauge of Fear & Volatility

The VIX index, measuring the volatility of the S&P500 index, is also known for being a gauge of fear in the market place. It is thus interesting to note how correlated it is to the bid-ask spread charged by desks making a market in the CDX IG index.


(The bid-ask spread is calculated within Bloomberg by the expression ASKPRC[IBOXUMAE Curncy] - BIDPRC[IBOXUMAE Curncy]. As usual, click on the graph to enlarge.)

This relationship will not surprise anyone who has been around a CDX trading desk in H2'07 and in 08... It's just striking to see how similar the two graphs are.

Apparently, credit markets got jittery ahead of equities at several occasions: first in July 07, when the bid-ask on IG reached 75bp then 1pt before the VIX touched 25; the spread then broke its then-record 2 points before the VIX broke its then-record 35; and it peaked before the VIX did. Its current level seem to forecast that S&P500 volatility should stay subdued for now.