As we continue to refine our distribution methodology, we are changing the form of content to make it easier for people to use.
The T report will be a daily summary of what has gone, what to watch out for, thoughts on the market and trading strategies. There will be growing focus on all forms of Fixed Income ETF’s.
We will also have “In depth analysis and explanations” where we will continue to dissect what is going on in the markets in detail, with a focus on issues that we think are not well understood, yet are important, either immediately or in the near term. Ones that we view as “less” immediate will be included in a bigger weekend package that we will be targeting for Friday afternoon delivery.
Then we will start to track our “Best Ideas” and send out timely information when we are adding a idea, or taking one off. That should work as a time-stamp for what trades we have the most conviction in. This first cut isn’t as clean as we would like since the process is just beginning, but it should become more precise (traceable) over time.
Short IG18. We liked shorting some back on the 21st at 85.75 and yesterday again at 91 (we sent out the trade at 3:31). We are keeping this double idea on. Will likely close out one of the 2 trades later today, but with IG18 continuing to trade almost 7 bps rich to fair value, this trade seems to have the most hope of triggering some stop losses on the way wider, and will continue to struggle to go much tighter. It is a combination of technical and fundamentals.
Spain and Italy:
We had liked being short ½ a trade in Italian or Spanish CDS and ½ a trade in Spanish 10 year bonds. Both Spanish and Italian CDS have moved out significantly, and we are taking that trade off. Fundamentally still believe that they will widen, but CDS has more potential to snapback here, than bonds, and with a double short in IG18, it is too bearish. We continue to like being short 10 year Spanish bonds. It is long dated enough that LTRO has limited impact, and we have broken through key supports. If we get a bounce on anything other than strong ECB intervention, would actually add to the 10 year Spain short. If you have trouble borrowing bonds, than stick to CDS short.
For those not so inclined to trade the credit markets, you can replace these shorts with your favorite risk-off trade. The risk-on mentality cannot be sustained if Spain continues to struggle.
We continue to like long 5 year Italian bonds versus short 5 year Spanish bonds. The yield spread has gone from 21 to 5. In 5 year CDS, Spain trades almost 50 wider than Italy. In 10 year bonds, the spread is over 30 bps. We think the trade could go from -5 to +10 as a final target. Again, it does depend on your ability to borrow on short side. This trade is pretty risk neutral and relies on idea that the technical in the market will disappear as real risk pricing overwhelms artificial liquidity pricing.
Long GGB 2% of 2/24/23
We believe that Greece will have to restructure, but at 24, we like these bonds. They often decent current income, which offsets the shorts we have and are looking to add to. Any future Greek restructuring is likely to focus on the public sector holdings, so the subordination on these will increase. It is a bit strange not to have any compelling to like Greece, or to think these bonds avoid restructuring, but at 24, we think too much negativity is priced in, and often after Credit Events, we see the bonds slowly gain in price as all the weak residual holders get out.
Long HY17, Short HYG
We put this trade on back on March 16th. We should have taken some quick profits but still like it. At the time, HY17 was 98.25, and today it is 97.875. HYG was 90.70 at the time. It is 89.90 now, but paid a 0.55 dividend. HY17 has accrued interest as well. Basically a marginal trade, and although had been more of a bullish trade, we will leave it on as HY has underperformed IG in CDS space, and the high yield bond market is becoming too oblivious to what is going on in Europe or to yields in investment grade.
Fixed Income Allocations
Treasuries and HYG
We got out of HYG yesterday, and would continue to be flat that. We did buy treasuries to replace that allocation in our “core fixed income” portfolio. We suggested getting out of treasuries this morning on the bounce. Treasuries continue to be very overvalued if the economy improves, but evidence that the crisis in Europe is about to become daily conversation again would be good for treasuries, so we are back to flat, after what seemed like a mistake in the market reaction yesterday.