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.