If You Own CSJ, We Would Sell

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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