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If You Own CSJ, We Would Sell

Tyler Durden's picture




 

One of the most crowded trades around is short-dated credit - especially short-dated positions in higher yielding debt. Its the Goldilocks trade - not too hot (low duration and things will be ok for the short-run) and not too cold (carry and yield advantage is relatively good) - for every fixed income manager with new money to put to work. However, recent events are bringing stress into the here-and-now and jump risk (or more immediate concerns of significant credit events)is rising. Credit curves have flattened significantly in the last few weeks and are back to 'normal' given spread levels but it is the composition of the CSJ ETF (short-dated credit bond fund) that is most worrisome. Heavy exposure to Supranationals, Agencies, and Financials - all of which we have highlighted in recent weeks as showing significant systemic weakness - makes us and Peter Tchir of TF Market Advisors nervous.

 

[CSJ - iShares 1-3Y Credit Bond Fund] is yielding 1.74% which isn't bad for 1-3 year paper, but the portfolio concerns meZerohedge picked up on weakness in EIB paper over the weekend.  EXPT got downgraded today and bonds are being hit hard (I suspect Norway will step up and buy bonds, but 5 year bonds are down 30 points).

 

CSJ in my opinion is too weighted towards non corporates.  Supranationals represesnt 11.6% of the portfolio (EIB, WB, IBRD, etc.).  Agencies make up another 8.2% of the portfolio (KFW, Svensk Exportkredit, KDB, Eksportfinans (charted below), etc)  and Financials make up 27% of the portfolio.

 

I just don't see that as a good way to earn an extra 1.5% per annum right now.  Too much going on in the world, and financials and supranationals, are at the heart of it.

 

I believe CSJ is just tracking its index, it is just, in my opinion, a bad index to track.  3 year corporates would be much nicer, though I suspect the yield would be smaller as fins in particular give this fund the yield.

 

Buying CSJ to earn a few extra bps when there is real chance of principal-related pain does not seem like an optimal risk trade to us.

Charts: Bloomberg

 

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Tue, 11/22/2011 - 10:56 | 1902369 SGS
SGS's picture

Balls volume on options.  Volume in general sucks.  Fuck.

Tue, 11/22/2011 - 11:00 | 1902387 Hard1
Hard1's picture

That could be a good trade.  If you think there is a chance of principal loss, options are reasonably priced at 7-9% vol

Tue, 11/22/2011 - 10:56 | 1902370 CvlDobd
CvlDobd's picture

Damn, can't hide anywhere.

VCSH look any better?

Thank for the analysis.

Tue, 11/22/2011 - 10:58 | 1902375 imsaul0968
imsaul0968's picture

For those of you who invest in an IRA or for long term goals, theres a better approach than buy,hold,hope. Stocks follow the economy so analyzing the economy, specifically the factors that are "leading indicators" and having exposure to equities only when the economy is headed in the right direction and avoiding equities in favor of safe haven baskets is a much more logical approach. And missing the major drawdowns is the only way to help ensure meeting your goals.  If you are interested in investing in a portfolio that tactically invests in equity and safe haven baskets via ETF's automatically, please email me at:

eclark@breakaway-partners.com

and I'll add you to the weekly market commentary & portfolio update distribution list.  Its free to add you and you can follow along our model and our views.  We have been RISK-OFF since 6/30 so have missed all this wicked volatility. Currently invested in short duration treasury baskets as flight to safety drives interest in our debt. 

Tue, 11/22/2011 - 11:09 | 1902400 fuu
fuu's picture

wtf is this guy still here? 24 straight hours of posting in every thread.

Even oobrien and paarsons give it a rest.

Tue, 11/22/2011 - 11:47 | 1902593 slewie the pi-rat
slewie the pi-rat's picture

as does ORI, who doen't seem to have "partners" in his ad-bot model, which this shitheaded troll is following, but he his less 'feceFuk friendly' than ORI

L0L!!!  that typo is stayin, BiCheZ!

Tue, 11/22/2011 - 11:21 | 1902463 stop.snitching
stop.snitching's picture

imsaul0968. Please. Just. Stop.

Tyler...you should revoke the membership of this clown!

Tue, 11/22/2011 - 11:52 | 1902615 slewie the pi-rat
slewie the pi-rat's picture

L0L!!!

are you snitching?

on your 4th post?

welcome to zH!

and...no soup for you!

Tue, 11/22/2011 - 11:01 | 1902390 rickA
rickA's picture

low open interest on the put options on csj. wonder why

Tue, 11/22/2011 - 11:07 | 1902398 Captain Kink
Captain Kink's picture

Reaching for yield begins the crisis countdown, and all credit risk will will be tested.  Even money markets are terribly risky right now...and pay no return. get out if you haven't already...

Tue, 11/22/2011 - 11:06 | 1902410 Mercury
Mercury's picture

Buying CSJ to earn a few extra bps when there is real chance of principal-related pain does not seem like an optimal risk trade to us.

...and how do you feel about no extra bps money market funds?

Tue, 11/22/2011 - 11:32 | 1902522 devo
devo's picture

Can anyone recommend a good corporate bond fund?

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