The Structured Research Credit Tracker
Global
Global Credit
Strategy
Loans, high yield, tranches and CLOs: The significant rallies in loans and
high yield, combined with the catch-up rally in the cash CLO space, leave us
at an interesting valuation juncture. The new LCDX13 tranches have
standardized coupons and no losses, allowing us to take a fresh look on both
an absolute basis and relative to cash CLOs and HY CDX tranches. (See
Loan Tranche Crossroads, 30 October, 2009).
Super senior shorts and mezzanine longs: At DMs of approximately
300bp and dollar prices in the high 80s, we believe that cash CLO AAAs offer
better value than their synthetic counterparts in both LCDX13 and HY13. We
like pairing a short in 5yr LCDX13 30-100% against long cash CLO AAA
positions. In contrast, we like being long 15-30% risk in LCDX13 and believe
it compares favorably to cash CLO AAs, owing to thicker tranching and its
unfunded nature.
Credit vol has lagged the VIX spike – hedge into the year-end: Credit
volatility has lagged the spike in equity volatility. December 09 bearish risk
reversals (buy OTM put, sell OTM call) are good low-cost overlays with
muted vol exposure, but downside convexity for HY longs. We also like
pairing our favorite HY tranche long (HY 25-35%) with risk reversals as a
good way to implement the HY compression trade.
Mezz curves to benefit (CDX IG9 3-7% 5s/10s steepeners); super senior
curves to flatten (iTraxx 22-100% 5s/10s flatteners): Super senior
tranches are much steeper relative to pre-crisis levels than index curves, and
we expect incremental steepening to benefit junior tranches the most. An
alternative to junior tranche steepeners is super senior flatteners, in
particular with iTraxx S9.