Yes and thank you for the great question. All valid points but you’re getting paid 8% with a spread of 350 bps to treasuries and an effective duration of 3.5 years, so below 5 year maturities. You’re long front-end risk with massive positive carry and an option for continued nominal strength and no recession. If that breaks front end rates rally while spreads widen. Unless a disastrous recession it’s a good r/r trade.
I think the thesis makes a lot of sense. Central Banks are bag holders for mark to market duration losses and for Fed at least what does it matter. The trade though, doesn't make sense to me? Isn't High Yield particularly risky as higher rates continue to apply pressure to that very asset class where the trade is sitting? Shouldn't high rates (as long as they persist) drive the businesses which tend to find themselves in the high yield bucket deeper into distress as they tend to find themselves refinancing into worse conditions? At some point won't those hy spreads blow out(taking the trade with them )?
I guess I presuming details about the trade (and that I inferred from the chart correctly)... But wondering if he's expecting hyg etf's nav to trend up with spoos?
thank you for the great question. I guess the rationale is that you are getting paid 8% for a 3.5 year duration, < 5 maturity index which has currently a spread of 350 - 400 bps which is not bad for a front-end carry trade. I guess its also good in collecting carry while nominal growth is still okay. You have some front-end protection should the Fed start cutting while spreads would also widen in a recessionary scenario. I guess its good r/r as long as we're not talking a darker recession scenario. I will try and find data on the upcoming refinancing schedule and average balance sheet strength.
This is an excellent article. Thanks for sharing, very timely. The charts of HY and Leverage Loan migration by sector are invaluable. An argument can be made for owning HY in some small size but I would avoid Leveraged Loans.
Yes and thank you for the great question. All valid points but you’re getting paid 8% with a spread of 350 bps to treasuries and an effective duration of 3.5 years, so below 5 year maturities. You’re long front-end risk with massive positive carry and an option for continued nominal strength and no recession. If that breaks front end rates rally while spreads widen. Unless a disastrous recession it’s a good r/r trade.
I think the thesis makes a lot of sense. Central Banks are bag holders for mark to market duration losses and for Fed at least what does it matter. The trade though, doesn't make sense to me? Isn't High Yield particularly risky as higher rates continue to apply pressure to that very asset class where the trade is sitting? Shouldn't high rates (as long as they persist) drive the businesses which tend to find themselves in the high yield bucket deeper into distress as they tend to find themselves refinancing into worse conditions? At some point won't those hy spreads blow out(taking the trade with them )?
I guess I presuming details about the trade (and that I inferred from the chart correctly)... But wondering if he's expecting hyg etf's nav to trend up with spoos?
thank you for the great question. I guess the rationale is that you are getting paid 8% for a 3.5 year duration, < 5 maturity index which has currently a spread of 350 - 400 bps which is not bad for a front-end carry trade. I guess its also good in collecting carry while nominal growth is still okay. You have some front-end protection should the Fed start cutting while spreads would also widen in a recessionary scenario. I guess its good r/r as long as we're not talking a darker recession scenario. I will try and find data on the upcoming refinancing schedule and average balance sheet strength.
just saw this flashing in my inbox and thought it would be useful to share.
https://www.guggenheiminvestments.com/perspectives/sector-views/high-yield-and-bank-loan-outlook-july-2023
This is an excellent article. Thanks for sharing, very timely. The charts of HY and Leverage Loan migration by sector are invaluable. An argument can be made for owning HY in some small size but I would avoid Leveraged Loans.