9 Mar 2015
What are the QE “trades” in credit? - BAML
FXStreet (Barcelona) - With ECB’s QE kicking off, Ralf Preusser, Rates Strategist at BofA-Merrill Lynch, sees a bias to lower quality credit outperforming higher quality over the next few months.
Key Quotes
“Amid QE, a rising tide lifts all boats. So in credit the path of spreads is still tighter, and we see a bias to lower quality credit outperforming higher quality credit over the next few months.”
“In terms of second-order QE effects, we continue to think the following sectors still have upside:
Single-B HY. While spreads have tightened 100bp already this year, the sector remains 100bp shy of last April’s levels. Two tailwinds should aid performance. Firstly, Eurozone growth, which is showing signs of a cyclical upturn. Secondly refinancing, with high-yield companies increasingly looking to retire bonds early (even before first-calls) and refinance at today’s levels.
Corporate hybrids, where subordination premiums continue to look generous in our view. We think new issuance should actually help the sector, as new deals will be at par and help investors reduce their exposure to 101 call risk (note the sector’s cash price is 109 now).”
“To beef up yields, we continue to believe that investors should move down the credit spectrum in short-dated and medium maturities. We are still not comfortable recommending investors reach significantly along the credit maturity spectrum.”
“Note that our rates forecast is for higher 10yr and 30yr Bund yields by year-end, as rebounding inflation gets priced-in. This could pressure spreads at the long-end of the credit curve in due course, we fear.”
Key Quotes
“Amid QE, a rising tide lifts all boats. So in credit the path of spreads is still tighter, and we see a bias to lower quality credit outperforming higher quality credit over the next few months.”
“In terms of second-order QE effects, we continue to think the following sectors still have upside:
Single-B HY. While spreads have tightened 100bp already this year, the sector remains 100bp shy of last April’s levels. Two tailwinds should aid performance. Firstly, Eurozone growth, which is showing signs of a cyclical upturn. Secondly refinancing, with high-yield companies increasingly looking to retire bonds early (even before first-calls) and refinance at today’s levels.
Corporate hybrids, where subordination premiums continue to look generous in our view. We think new issuance should actually help the sector, as new deals will be at par and help investors reduce their exposure to 101 call risk (note the sector’s cash price is 109 now).”
“To beef up yields, we continue to believe that investors should move down the credit spectrum in short-dated and medium maturities. We are still not comfortable recommending investors reach significantly along the credit maturity spectrum.”
“Note that our rates forecast is for higher 10yr and 30yr Bund yields by year-end, as rebounding inflation gets priced-in. This could pressure spreads at the long-end of the credit curve in due course, we fear.”