Compression Trade Closed in Flaming Ruin

Forget it, trade closed Nothing but pain going forward. There is a stubborn view that the Fed will raise rates. There is rumor that ECB will actually do the effectual thing and buy corporate debt under tis QE program. While Greece may not be fixed, but who cares when you have a headline.

credit trade 2-20-2015.jpg

We have seen a large and persistent delta between series 22 CDX.NA.IG and its European counterpart (series 23) since the announcement of QE. Finally seeing some spread compression.

Whether this is an indication of euro-credit waking up to Greece or just reversion to the norm, don’t know. However, I would expect further compression based on better US news flow.

I'll keep you posted on this.

CDS compression.jpg

UPDATE:

The trade rationale is simple: labor market improvement in North America versus labor market malaise in Europe motivates stronger NA.IG. In contrast, ECB QE will have limited impact on corporates over time. The front-run trade is levering up on periphery sovereign debt. I’ve posted on this a couple of times now. Even if the Fed raises rates this year, the impact will be globally adverse—arguably more difficult for Europe than the US to handle.

The case for the United States credit, see the great post on MacroFugue at http://www.macrofugue.com/say-good-bye-to-the-new-normal/ showing the key factors driving the North American economy reaching escape velocity.

To summarize:

  • US Inflation breakevens reflect goldilocks inflation expectations.

  • Corporate and Household risk averse behavior is turning favorable

  • US household balance sheet repair—meaning defaults and belt-tightening have done their work

  • Trumping all the rest… US household formation is up and people are feeling good enough to fool around and have kids.

You are seeing none of it yet. It’s hanging at 7 bps.

compression trade 2-13-2015.jpg


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