33 Comments
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Louis Philippe de S Bergeron's avatar

Another masterpiece! I agree that credit spreads and a few other factors look veryyyyy compressed. Entertaining and instructive piece as always! Thank you!

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Zack Howard's avatar

Great read Shrub 🙏

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John G's avatar

Ten Years Gone is amazing. Page's solo just sings. And the main riff is killer. That is all.

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Wolfgang Tsoutsouris's avatar

Can't you just short/buy puts on HYG?

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Evan James's avatar

The problem is any event that causes spreads to widen could also have an equal rally in Treasuries such at you don't really get the pop on a short position in HYG and then you're just getting time decayed to death.

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Wolfgang Tsoutsouris's avatar

Not sure I understand. HYG simply represents the price of various high yield corporate bonds, not their spread over Treasuries.

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Evan James's avatar

Sorry I've seen a lot of discussion around how to get pure exposure to high yield credit spreads widening. I was commenting that a short on HYG is something of a beta trade.

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Wolfgang Tsoutsouris's avatar

To clarify - you would expect Treasuries and HYG to take proportionally similar hits?

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anton skrypec's avatar

I was thinking the same thing.. short HYG except the negative carry is going to hurt over any sort of timeframe?

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Wolfgang Tsoutsouris's avatar

Fair point re: shorting. Puts? IV is rather muted right now, though still above historical vol.

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anton skrypec's avatar

The neg carry will be reflected in the fwds still (I think!)

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Wolfgang Tsoutsouris's avatar

Assuming you're referring to dividends, not sure it will have that big an impact on put pricing.

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anton skrypec's avatar

I am an fx guy so I might have this wrong but if you are shorting hyg then doesn’t the implied yield you have to pay get reflected somewhere? Or am I wrong in that if you short this etf (or buy a out) you don’t have to compensate for the dividend somewhere

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Wolfgang Tsoutsouris's avatar

If you short it, then I believe you are on the hook for dividends. If you buy a put, I'm sure the dividend is baked into the pricing somehow, but I believe it is a much smaller impact that other factors such as Vega, Gamma & Delta.

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Carolina's avatar

"If we don't give them the ratings, they will go to Moody's right down the block!"<https://www.youtube.com/watch?v=9xZx1lf2tvs&t=19s>

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M. de Ruyter's avatar

Can’t wait for “whole lotta QE”

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Jaakko Häkkänen's avatar

Wonderful post yet again. Imo very tough spot to trade rates or even us equities, but this post shows how alternative ways to place trades might change the risk/reward profile more favorable! Thx.

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Bob Bedford's avatar

Corps have been trading on yield not spread - meaning ja'mokes have been thinking "this is the last time I'll ever get 5-6% bonds ever again", and lifting - regardless of spread.

On almost any look back window, save 1997-1999, you're supposed to be short spread risk here.

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derek's avatar

Another great issue of Mad Magazine. Alfred E. Neu-shrubman at his finest.

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Darren's avatar

Isn't there a rate hedged HY bond ETF you can long or short to bet on widening or tightening spreads? Looks like maybe HYGH can be used to directly express a view on HY spreads?

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Joshua Hughes's avatar

Bondzo!

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Chris C's avatar

Shrub don't forget for whatever its worth that SMCI is the largest component in the Russell2000.

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@drsxr's avatar

Man, I hadn't listened to that one in about 20 years. Right On!

I'm not a rates guy so I won't short the HYD but I'll definitely not go long IWM until we see rotation from Lg cap into it on declining rates (IF soft flanding which won't happen except on papelito).

If we tie it together with the current environment, TX will be on the "banks ok to crush" list and NY stays on the "banks we will save" list even though you can't get a DIME for that list. Get it? DIME?

You know if you neglect your Tamagotchi it turns into a monster.

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Andy Fately's avatar

agree conceptually here but those credit spreads have been stubbornly tight. I was looking at them last year and was arguably too early. But are we still? need a structure with limited time decay I think

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Michael Herring's avatar

I think an inevitable uptick in defaults will do the trick

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Andy Fately's avatar

Indeed, they have just been slow in coming. what we all should have learned in this cycle is things take far longer to play out than to think out

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Humberto's avatar

Great read, thanks for sharing your insights. I had been tracking OAS spreads but it got to be like watching paint dry. More interesting is your observation that we’re moving into the credit risk part of the cycle. Simplify asset management has some interesting ETFs in this space. Harley Bassman, convexity maven, recently did a write up on the spread trade.

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