Explain how credit default swaps can be used in an actively managed fixed-income portfolio

The CDS protection buyer pays a periodic premium and is compensated if the reference entity defaults; the seller takes on credit risk without funding a bond. Selling protection is therefore a synthetic long credit position and buying protection a short one. Contracts use standard coupons, with an upfront payment settling the difference from the market spread; for the protection seller, the value change is roughly −(change in spread × effective spread duration × notional). Active uses include single-name views, credit curve trades (for example selling 5-year and buying 10-year protection), index CDS for macro or sector exposure, and basis trades that exploit gaps between bond and CDS spreads. The trap is confusing direction: the protection buyer gains when spreads widen.