Via Peter Tchir of TF Market Advisors [4],
There is still hope that the cash markets will see strong demand, but yesterday didn’t exhibit any rush to put capital to work.
[5]
With HYG and JNK and both trading at a significant premium (2% is a big premium in a 7% yield environment when the market isn’t bid without). We are at best case neutral on these, and if anything would be selling under the assumption they will underperform in a rally, and catch up quickly in a sell-off. HY17 still seems to offer the best value for a quick trade, but with so many negative headlines coming out of Europe and the hedgers starting to poke around, it is fairly neutral for us, though not a recommended short.
We remain decently positive on LQD on a hedged basis. Without a treasury hedge we just don’t see much value there. The FINS could continue to outperform as central banks continue to offer liquidity programs, but with Europe feeling tenuous at best, the FINS don’t look set to gap tighter. On a hedged basis, LQD, and particularly the FINS component could do well. It is a bit rich, and performed well yesterday (on a rates hedge basis). IG17 seems far too rich. Too many hedges taken off. People got too excited by the single name roll on December 20th and pushed IG17 tighter on that too. We aren’t particularly concerned about the IG space, but IG17 seems to be a very poor way to be long and offers better shorting opportunities.
Munis actually still seem to offer decent value, with BABS looking more attractive than MUB. With the economy showing signs of not rolling over (yet) these could attract some retail interest. MUB is more attractive with a small rates hedge. BABS seems to offer the best value, but is by far the smallest of the ETF’s we have started looking at. Many BABS bonds finished the year near their widest spreads of the year. It is worth a shot, and is the only IG product we could see running without a rate hedge.