Tuesday, April 7, 2009

Buy Euro HY CDS

Or so says ING, predicting a 40% rise in HY European CDS. ING is recommending (and likely axed in) a trade where accounts buy Euro HY CDS and sell IG CDS. As per the below chart of the day, ING analyst Maureen Schuller sees the iTraxx Crossover rising roughly 400 bps to 1,300, compared to a projected rise of only 40 bps for the iTraxx Euro IG.

What is the fundamental catalyst for the underperformance in HY:
“Bleak economic conditions warrant wider spreads,” Schuller said. “The greater refinancing risks and consequently default risks for speculative-grade issuers will contribute to underperformance compared to investment-grade issuers.”

European companies must refinance 565 billion euros ($756 billion) of debt maturing by the end of 2010 and speculative- grade issuers will have the most difficulty amid the “rapidly deteriorating” global economy, Standard & Poor’s said last week.
Somehow the global equity market has missed all of the abovementioned memos, especially over the past month.

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Anonymous said...

Anywhere I can find this?

Tyler Durden said...

this came from bberg's chart of the day. i think it is only for subscribers

Anonymous said...

This trade is not so crazy and we have been playing it on and off in US HY-IG land BUT (and it is a big BUTTT) you gotta get the delats right...flat notional costs too much and is not a great risk-reward but it can be constructed to be efficient - notice that HY11 and HY12 seem to be doing the same thing - traders betting that HY11 underperforms HY12 (or at least defaults are front-laoded in the shorter maturity, lower duration index)...anyone else playing this?

Rio said...

Not so fast. There is very little refinancing risk in the European High Yield space for the next 2-3years - during the last bull market (i.e. until the end of 2007), all major HY issuers in Europe have termed out their maturity. Though there are the obvious operational problems in HY due to the downturn, the much bigger refi risk in Europe is in the IG market. High Yield spreads are currently more a function of risk appetite and loan/IG spreads, but otherwise it is not were the action is in the short and medium term.