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Corporate Steepener Trade Breaking Out
The CDX IG12 5s10s curve has just hit a high since the March lows, following the equity market drum beat. The popular flattener trade has now unwound as more accounts start shifting into corporate steepeners. As we have noted in the past, IG new issuance has likely peaked, and in the face of dropping new commercial paper issuance, the supply overhang is muted, forcing managers to play with the corporate curve. The 5s10s trade was one of the most popular ones in the halcyon days of late 2006 and early 2007. With near-term refi risks effectively eliminated the corporate steepener seems the place to be, especially as equities continue indicating heightened inflation pressures, yet contrary to what the Treasury market demonstrates. Nonetheless, the upcoming roll in CDS should be one to watch.
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How about dumbing that down a bit?
It just means that for IG (Investment Grade) corporate bonds, there is an increasing difference in yield between 5 year and 10 year maturities.
The 10 year typically yields more, since there is more risk than the 5 year. This difference in yield correlates to the difference in perceived risk (i.e. if you lend for a longer time, you expect better returns since you are exposing yourself to risk for a longer period).
When this diff is low, the curve is said to be 'flattening', and can be interpreted as low expectation of risk.
When the diff is high, the curve is steepening, and means the bond buyer wants to be compensated for higher risk.
Not investment advice, I am not a trader or finance-guy, just a humble engineer.
I have no idea what I just read. Anyone care to help me out?
did the usd just hit zero or did the ramp start 2.5 hrs early today?
what the fuck is IG12 5s10s. we live in different caves.
check R.V [Romarco] gold mine a-leaping. you could wish
I think he talks about the credit market. The capital structure of a company consists of equity and debt so you have a market of stocks and other market of bonds (credit market). I think IG12 is a index an index that represents the value of bonds of a representative group of companies in the credit market (like Dow in the stock market). I recall (not sure) that IG "Investment Grade" refers to bonds of solvent companies while HY "High Yield" refers to companies with higher risk. 5s10s must refer to a difference in rates among different maturities, perhaps between 5 and 10 years.
IG12 is the Investment Grade Corporate Bond Credit Default Swap Index, Series 12, as tracked by Markit. There's one for 5yr maturities and one for 10yr maturities - in theory at least, the credits contained within are the same.
Since time, as in length to maturity, carries more risk, the 10yr Index trades higher (ie costs more to insure) than does the 5yr. Tracking the spread of the two quantifies this time risk.
And, the winner is.....Ding!....Ding!....Ding!.....Ding!...
Try Google for bear steepener curve
"I have no idea what I just read. Anyone care to help me out?"
I am with this guy
Is this brain surgery or rocket science?
Try to remember the 0.01% intelligence factor will ya!
Damnit.... I really need to become a derivatives trader... it's way more fascinating than Options.
LOL. To those who don't understand essentially what he wrote is that the probability of companies failing within 5 years to 10 years is increasing according to the CDS market. IE, corporate ability to profit in excess of inflation at this point is considered low and hence pushes their credit risk higher reflected in a higher YTM. Simple right? :) So the order flow is now moving out of the tightener trade (ie a bet that corporate yields go down) to the spreaders (ie a bet that corporate yields go higher)....
Cmon peoples, read up and enhance your education... if you don't you'll get hammered.
Americans are taught the language of the stock market in infancy. Bonds, on the other hand, remain completely obscure (and seemingly irrelevant) for most of us.
As I have learned more about the markets, though, I have come to see how the bond market is perhaps THE most important market to understand, even if you're not trading it. Bonds make (or overthrow) kings, start wars, keep the peace, and generally make the world go round.
I still have a lot to learn, but my advice to anyone who didn't understand the post above is to study hard so you do. As go bonds, so goes all.