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HY is not a Cheap Date

When it comes to high yield- by far the most engaging and attractive of the credit girls- she's not a cheap date. The value is in the energy sector. There is no point in praying for good risk management. You need energy prices to recover. That’s the vig, take it or leave it.

In credit in general and high yield specifically, carry will play a bigger and bigger role in credit investing. This is part of a rising rate environment: it takes higher yields to draw in money. Nothing much else will do the trick.

We’ve had some sell-offs in the risky credit complex to make things more appealing. Sort of. You receive a little less than 2.5% to compensate for more credit risk.

When you look under the hood, prices are not what you would expect. In liquid names (and by implication each credit sector) the only place you are seeing real widening is in energy. Which is the place common viewed as the dead man walking. Have a look at traded CDS spreads, the rest hasn’t widened at all.

US HY 3Y by Sector

So the real question is whether the energy sector really is a dead man walking or not. Peabody 3Y spreads are over 1200 bps, and roughly has enough cash to stay in business for about a year with negative cash flow. There is no point in praying for good risk management. You need coal prices to recover.

Here a view of the intrinsics I monitor.

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