Another masterpiece! I agree that credit spreads and a few other factors look veryyyyy compressed. Entertaining and instructive piece as always! Thank you!
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.
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.
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
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.
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.
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.
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?
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.
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
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.
Another masterpiece! I agree that credit spreads and a few other factors look veryyyyy compressed. Entertaining and instructive piece as always! Thank you!
Great read Shrub 🙏
Ten Years Gone is amazing. Page's solo just sings. And the main riff is killer. That is all.
Can't you just short/buy puts on HYG?
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.
Not sure I understand. HYG simply represents the price of various high yield corporate bonds, not their spread over Treasuries.
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.
To clarify - you would expect Treasuries and HYG to take proportionally similar hits?
I was thinking the same thing.. short HYG except the negative carry is going to hurt over any sort of timeframe?
Fair point re: shorting. Puts? IV is rather muted right now, though still above historical vol.
The neg carry will be reflected in the fwds still (I think!)
Assuming you're referring to dividends, not sure it will have that big an impact on put pricing.
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
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.
"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>
Can’t wait for “whole lotta QE”
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.
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.
Another great issue of Mad Magazine. Alfred E. Neu-shrubman at his finest.
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?
Bondzo!
Shrub don't forget for whatever its worth that SMCI is the largest component in the Russell2000.
Thanks
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.
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
I think an inevitable uptick in defaults will do the trick
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
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.