A couple of obvious stories and follow-ups.
HY17, which we liked the most yesterday, significantly outperformed HYG and JNK. That trade may have a bit of room to run so wouldn’t take it off yet, but is encouraging to see about a 0.5% move in that convergence.
HYG and JNK were both down marginally yesterday. That made sense since the market was okay, not great, and it allowed the premium to shrink. The weird part, is that HYG was down on a day when it had an increase in market value of over $200 million! HYG and JNK had share creation yesterday totaling over $250 million. That is a big flow and is a bit surprising that the indices were able to trade down on such retail demand – I guess the share creation process is fair.
With what is going on in Europe, HYG and JNK are both outright shorts for a quick trade. I think NAV will drop and we will see a push on these to trade to NAV so a down move of 1% to 3% seems likely and they will struggle to go higher until premium is reduced, so being short not likely to hurt.
BABS which we like traded down and remains weak, but versus treasuries (rate hedged) it did okay. We still like this trade, it’s a shame the ETF is so small.
LQD did well if you hedged for treasuries, which we recommended, but did nothing outright. At these yields we would not own LQD outright and may even short, given the 1% premium. It is clearly hitting a cap on the corp side as too many corporate bonds don’t yield enough to meet “real money” hurdle rates. The financial component continues to struggle, and with renewed problems in Europe, financials are unlikely to get a bounce in the near term. Hedged LQD (a spread play) is now neutral for us, given the weakness in Europe.
IG17 seems like an attractive short, and is having trouble bouncing on anything – investors are too long (again) and will come after IG17. The 7 bps of richness is too much with the market struggling and showing no signs of an avalanche of new money that many expected (or hoped for).
MAIN is at 174 (2 wider on the day). It was as wide as 176. The FINS CDX index is back to 280. It closed at 265 on January 3rd. That move alone is enough to make us concerned about owning credit here.
Eastman Kodak was rumored to be hiring lawyers for a potential bankruptcy filing. Expect further pressure on weak companies, particularly at the short end of the curve. That may create some opportunities in good companies with no near term maturities as their short dated CDS gets taken for a ride with the names that deserve to price in more jump to default risk.