Tuesday 3 December 2013

Credit - Chart of the Day - Dwindling EUR Credit Assets Yields

"We live in a moment of history where change is so speeded up that we begin to see the present only when it is already disappearing." - R. D. Laing, Scottish psychologist

While we touched in April 2013 on the epic hunt for yield in our conversation "The Night of the Yield Hunter", we thought this graph coming from Morgan Stanley's 2014 Credit Outlook entitled "A Market of Many" would illustrate yet another year of epic "hunt" for yield witnessed in 2013, namely the volume of EUR Credit Assets Yielding over 10%:
- source Morgan Stanley

We have played the game back in September 2011, such as buying some Financial Subordinated bonds retail Tier 1 paying 12.5% coupon for a cash price of around 94.5, to see them pass 130 in cash price recently. 2013 has truly been another year of "grab a yield" in the European market.

It is not really a surprise in the current process of "Japanification" in the credit markets. After all as we wrote back in 2012 in our post "Deleveraging - Bad for equities but good for credit assets", while 2013 has been a great year for equities, high beta in the credit space has also seen some very good returns thanks to convexity and the correlation with equities. The issue of course has pointed out by Morgan Stanley in their 2014 outlook is for callable High Yield / High beta bonds given negative convexity and that 71% of high yield is callable today in the US at an average call price of $103.90. In Europe its 54% of the High Yield universe bond market now trades to call creating negative convexity but to a lesser extent than the US, so switching to bullet bonds and playing High Yield via CDS for better upside makes sense, but that's another story.

"Insanity - a perfectly rational adjustment to an insane world."- R. D. Laing,  Scottish psychologist.

Stay tuned! 

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