High Yield Indices = Roller Coaster

While I am having trouble finding an intra-day graph of the HY12 Index, I would like to point out to readers that that High Yield market has been NUTTY over the past 7-10 trading days. Here is the graph (prices) since the beginning of this month:

To give you context, 8 points is a MASSIVE move. Today, I walked into the office, and the market was up nearly 2 points. A few hours later it was up only 1/4 of a point and ended the day up 3/4 of a point. Over $2.5B of the HY indices traded today.

Most traders and analysts get 1000s of Bloomberg runs a day. What I find particularly interesting is the comments that the Index traders make throughout the day. Here is just a snippet of what went on today.

Tommy Leung at UBS says:
Yesterday I said "ride the long until trend turns", which luckily has worked quite ell. But having seen today's price action, I think the short-term rally that started last week is mostly done for now. If I have a 3-month horizon, I'd still hold my long positions, but if my focus is day-to-day trading, I'd close my long here.

Why? Fundamentals haven't changed in the past 7 days, so we can ignore that. In terms of technicals, I think we might have seen the dealer capitulation trades today. We have seen HY moving up $1-$1.5 everyday for the last few days, but the move this morning is simply extraordinary. At 9:32am, HY12 was 96-96 1/2, already up $2. At 9:35am, 96 1/2 got lifted. Buyer didn't try to show 1/8or 1/4bid, he/she just lifted the offer outright. This smells like the "I-am-short-and-I-got-tapped-on-the-shoulder-by-manager" short covering trade, which usually marks the short-term peak of a rally. Don't forget the "trapped longs" who bought at $96 or $96 1/4... they are probably a little nervous too.

So I'd start closing long positions here. But don't short yet, fighting the trend seems very risky, might as well wait for the trend to turn first before going short.

Trades to think about:

1) HY/LCDX - The price differential is back to $3-$3.30 area. Spread differential is around 75bps. You're basically paying 75 bps to go long senior secured and short unsecured (not a perfect match given the difference in constituents). Downside is probably $0.5 and upside about $2. I think it makes sense to buy LCDX and sell HY here.

2) IG/Main - This has been a great pair to trade the range - sell IG buy main at 25 or wider, buy IG sell main at 18 or tighter. The pair is back to around 17/18, but I think the range is broken by the ongoing compression. Leave it alone and wait for the spread differential to get back to >22, then it probably makes sense to sell IG vs. buy main again
Andrew Goldman at MS says:
HV12 213/223 -7 IG12 98½/99½ -5 HY12 94⅞/95⅛ + ⅝ ***Craziest day in a long time. HY traded in a 1¾ point range all before noon. Off the run IGs closed as much as 31 bps tighter (IG4). IG 5x10 curves steepened as much as 18 bps
(IG3-5). At this point, I think there is going to be a lot of recalcing and F9ing overnight to determine where everyone stands positionally and to figure the right moves. Some of these front end points are pricing in a shockingly low # of
defaults and are probably cheap options at this point. With that said, if you dare to buy front end CDS right now you are staring a very very mean technical square in the face..
Jeffrey Chang at MS says:
LCDX12 97.90/98.20 +0.65 LCDX10

95.70/96.10 HY12 94⅞/95⅛ +⅝
*** Very heavy volumes traded today in HY with over 2.25
billion going through across HY8 through HY12. The violent
range in HY still has everyone's head spinning. The one
interesting thing in HY (different from IG) though is that
today front end curves resisted steepening as profit taking
keep the off the run HY indices in check. Also saw profit
taking of LCDX10 3y. Today felt a little like the market had
turned long recently and was trying to ride the momentum up

once HY looked like it wasn't going to bust through 96½
sellers came out of the woodworks despite stocks rallying
another 12 pts. Will be interesting to see what happens tom.
And finally, Roman Shukhman at JPM, who generally everyone on my desk agrees has the best sense out there of anyone on the street, at 1:00 PM today:
1.3bln HY traded so far today.. The range has been 94 3/4 - 96 1/2 which is one of the widest i've seen in a while. Right now it finally feels like credit may underperform stocks going fwd. While we may still rally I am starting to find more sellers of risk as we go higher and the gap we saw this morning isnt repeating itself even as SPX sets new highs...
Like most of my credit brethren...this is what I feel like:


Anonymous,  9/17/2009  

I am surprised you used their real names.. I don't know US credit desks, but did check on bloomberg and verified...

Hunter 9/17/2009  

10s of thousands of people get these guy's runs each day. It would be a disservice not to share their real names given how strong each of them are at what they do...

Anonymous,  9/17/2009  

Is there an etf, or way to get short a HY index??

vikram,  9/17/2009  

Ford Motor Credit $1bn deal priced inside guidance and plenty of other new deals ...seems like there is decent apetite for risk.

another comment from a dealer yesterday: "the last time the on the run HY index was at low 600s spreads SPX 500 was at 1400"

Anonymous,  9/17/2009  

keep on posting the credit trader color good stuff

Hunter 9/28/2009  

Vikram: Are you saying equities are underpriced? Sadly, the world is completely different right now than it was when the SPX was at 500 and hence credit spreads and the equity risk premium have changed.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.