Interesting Thoughts from a Credit Trader

A friend sent me this commentary from a credit trader at Deutsche Bank. Quite interesting commentary, especially given where credit spreads have moved in from:

In the past month we have been traveling a lot visiting clients and co-workers across the globe. The purpose of this was twofold, first we wanted to sell the New DB to the world. In our opinion we have built the best trading desk on the street and we have made great progress in converting ourself into a flow desk selling idea's and providing liquidity. Second we wanted to get a first hand snapshot of the new buy-side landscape, clearly the world has changed in the past year and we wanted see and talk to some of the new and old players that make up the new mkt. Although we have many more clients to see we would like to provide you with some interesting take aways from my trips.
1) CASH The cash on the sidelines is real and building, there is still billions of dollars on the sidelines and the number is growing everyday. Coupons and bonds rolling off are creating 100mm's a day at individual insurance companies on top fo the billions they already had, this cash may or may not be invested into the credit mkt's but its there and praying for a back up in spreads to deploy into credit. Many accounts are still seeing new mandates flow into the credit space including pension money being allocated to credit from equities thus the buying of 30yrs. There is no indication that the cash on the sidelines and the cash still coming into credit will change any time in 2010.

2) The dollar, rates and spreads We found it interesting that outside the US they are much more bullish on the dollar than many accounts we saw in the US. The dollar and its potential negative impact on rates was given by many US accounts as one the main risks to a continued recovery. We spoke to several European accounts about dollar mandates they either had or were close to getting, if you look at US spreads vs Euro or Sterling mkts its clear why they are interested in dollar debt. Almost everyone expected rates to be much higher at the end of 2010 than today, and that is why the new issue books for front end bonds is out of control. We did not find many accounts that thought spreads would be wider, almost everyone thought that IGs could get to the 60-70 area. That being said most accounts were looking at HY for performance next year, and many spoke about having compression trades on.

3) Basis and leverage We found more basis buyers and we were told by many that they expect basis to go from negative to positive in 2010, and we now have more accounts looking for HY basis than in the past few months. More than a few mkt participants spoke of having more leverage at their disposal now than they have had for some time. Very few thought that the correlation mkt would come back in the form it had but most thought the need for yield in the second half of the year would produce some bespokes with small amounts of leverage. Just a few weeks ago we got hit on some 8yr cds vs a new deal being done, the mkt was split on if that was a one of or if we will see more deals.



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.