CreditTrader

Why I Favor High Yield and Preferred Stocks

Don't forget to hedge your Treasury risk! Given where we all know Treasuries are going, your willingness to buy JNK or HYG on valuation basis requires that you sell TLH or some such to benefit from the cheapness of spreads relative to real default risks. I have heard so much from the mainstream talking heads on buying bond ETFs and yet none of them undertand the difference between yield, spread, and real performance.

CDS Prices Due for Sharp Adjustment Today

Few points worthy of discussion -
1) None (that is zero) of the nine entities that the US injected capital into on Monday are a part of the CDX or iTraxx indices, so be careful about broad index-related comment based on the positive/negative views of these financials.
2) We did see spread decompression in these names (or at least the seven that trade) in the 5Y but <3Y (which is the guarantee's maturity) compressed significantly and curves steepened considerably.
3) Historically, IG spreads must be around 140bps to cover investors for 'actual' realized losses through a 'normal' recessionary period. With IG around 200 in the US, we are clearly seeing a more prolonged and severe recessionary period with far higher defaults being priced in.
4) We would expect corporates to see some unthawing of the primary IG new issue markets as traditional managers can once again (in the absence of short-term default risk) buy the new issues and then buy protection from their favorite (guaranteed) broker to cover any concerns over credit quality. Given the concessions, this is likely to start soon (e.g. IBM's bonds went out well over 120bps cheap to CDS).

Hope this provides a little more color