Credit Markets have been weak for a couple of days now. European Financials have been widening daily, and although still much tighter than the start of the year, the confidence is eroding. In any case markets remain fairly illiquid and small volumes are driving prices more than they normally would.
There continues to be hope that a Greek deal is done. If one is done, I don’t see it lasting. On the other hand, I have to admit being confused about one thing. They talk about needing money to make the March 20th bond maturity, but at the same time they think they will get very high participation in the PSI. If the March bonds are going to be part of the PSI, why does Greece need so much money so soon?
LQD has stalled. I would not be long this. The yield just isn’t that attractive, and the yield risk is just too high. Spreads may seem attractive on the surface (though even those have compressed too much), but they are only likely to compress in an environment where treasuries are selling off, preventing the price of LQD rising. Right now I wouldn’t own it on a spread basis, and if anything I would be short it on a yield basis. IG17 also weak, though people who missed the rally and think the latest thing in Greece is just a negotiating ploy are starting to take on some risk.
The flows in HYG and JNK remain strong. Almost $5 billion year to date. Though I did see that as a % of HY fund flows, the percentage going into ETF’s has decreased. This makes sense to me, because at these yields, specific credit selection, and even specific bond selection is more important than beta, so a more managed investment makes sense. With premiums of close to 1% and the underlying market feeling a tiny bit heavy (2 fallback bids for every bond, rather than 3 aggressive bids), I would exit positions for now. Maybe even short. I wouldn’t expect a “big” move, but people should put a 2% move in the context of the yields. With HYG yielding 6.7%, then a 2% move is almost 4 months worth of coupon. If your whole argument is that 7% yield is great in a ZIRP world, it will take you 4 months to make up for that down move.
MAIN has remained reasonably strong, but it is starting to trade rich. The pain of being short, and the hope that Europe has fixed itself, and the fact that the ECB will accept loans to corporates as collateral for the next LTRO, have held it in, but as it gets rich, and as weakness in financials continues, expect Main to underperform.