For Now":ĭespite the change in view we still think it will be difficult to see much spread tightening. We have a hard time seeing the relative attractiveness in Europe of € High Yield versus € Investment Grade credit, as pointed out by Deutsche Bank in their European Credit Update note from the 13th of June, entitled "Carry is King. Sure, some would argue that it's all about the carry, and that given the ECB's supportive stance, it's all about "carrying on" through the summer lull. As we pointed out in our recent musing, when it comes to High Yield and, in particular, European High Yield, given the tightness of the spreads relative to Investment Grade, we have switched to being tactically negative, underweight that is. Of course, both of us, like many others, have seen this movie before. Me - "Not surprising, this is playing out like 2007, structured products issuance leads to relentless selling in CDS which is compressing even more spreads and market makers can't recycle in the market because the only takers would be loan books buying protection. Him - "I've had banks pretty much telling me I can name my price in itraxx tranches, off the back of structured stuff they've issued to retail." Discussing recently with another credit pundit on a macro chat platform, we reminded ourselves of the 2007 spread compression with the current situation: Reminiscences of a flow credit operator comes to mind in true 2007 fashion these days, given the continuous inflows into Investment Grade funds, in conjunction with continuous tightening in credit spreads. Macro and Credit - If you love low volatility, stick to investment grade credit Final charts - Italy? It's getting complicated.Macro and Credit - If you love low volatility, stick to investment grade credit.In this week's conversation, we would like to look at why credit is "carrying on" and why we prefer, for the moment, playing it safe via Investment Grade in case volatility heats up in the near future. For now, in all markets it's "Circus Maximus" as we move towards the euphoria stage, with additional melt-up in asset prices in the final innings of this great credit cycle, we think. This poem appears to be the 29th poem of Charles Baudelaire masterpiece, Spleen de Paris, from 1869.Īs one knows, the "Devil is in the details", and if indeed the Fed is serious with its hiking plan and balance sheet reduction, then it does indicate that, regardless of the slowly turning credit cycle and the flattening of the yield curve, there is an increasing possibility of the liquidity tide to turn - you have been warned. We have used in the past as a title for a post a reference to the great text from Charles Baudelaire called the "Generous Gambler". "The greatest trick central bankers ever pulled was to convince the world that default risk didn't exist" We posited in the past the following quote, which was a derivation of Verbal Kint's quote in the Usual Suspects movie: While we have been quite comfortable riding the uninterrupted bullish tide from our short-term "Keynesian" perspective as indicated in our earlier musings of 2017, as of late we indicated that tactically we were reducing our beta exposure credit-wise and that we would rather stick to quality given that not only we feel that the credit cycle is slowly but surely turning, but it feels like when it comes to the abundant generosity from our " Generous Gamblers" aka central bankers, when it comes to the Fed and the latest FOMC, it feels like the tide is turning. In its fully developed form, it became the model for circuses throughout the Roman Empire. It measured 621 meters (2,037 feet) in length and 118 meters in width and could accommodate over 150,000 spectators. Watching with interest new records being broken in equities reaching new highs, with credit "carrying on" thanks to uninterrupted inflows into funds ($6.5 billion of inflow into European IG credit funds and high grade funds recorded another week of inflows - their 21st in a row, according to Bank of America Merrill Lynch), we reminded ourselves for our title analogy of the Circus Maximus, the ancient Roman chariot racing stadium and mass entertainment venue located in Rome, which was the first and largest stadium in ancient Rome and its later Empire. "I can calculate the motion of heavenly bodies, but not the madness of people."
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