What is the point of credit research? Is it to provide trading ideas to hedge funds or is it to let traditional investors know if the corporates backing the bonds in their portfolios are about to go bust? Sell-side research houses seem universally to have plumped for the former role, and have been moving away from maintenance research to anticipatory research for some time. But why have they done this? Is it because it is the right thing to do or simply because hedge funds trade more and are prepared to pay for ideas?
There is no doubt that the advent of the CDS market has changed credit research beyond recognition. It has moved away from fundamentals and towards technicals and valuations – inboxes are crowded with comment and analysis on every move the iTraxx indices make. Indeed, it has become far more akin to FX or equity research, focusing on price curve basis movements rather than grinding through detailed numbers on core holdings. And the move from published research to desk analysts at some houses only accelerates this development.
It is not hard to fathom why this change has happened. First, the buy side is now made up of hordes of ex-sell-side traders hungry for trade ideas.