Daily Credit ETF and Index Summary (12.01.10)

Sources: Bloomberg, TFMA

HYG and JNK have now attracted almost $1 billion in new money this year.  An incredibly strong start to the year in terms of flow, yet the performance has been very weak.  HYG is down for the year and JNK is virtually unchanged.  That is largely due to the fact that they started the year with such large premiums to NAV and the underlying bond market didn’t have the strength to justify it.

As of yesterday we remain neutral on these ETF’s, which is an improvement from our start of year idea to short them.  HY17 is the index we liked the most, and although we are neutral on it as well, it is having a nice pop this morning and is trading at 94, up ½ point since the close.  It is a liquid hedge and is responding well to the ramp up in stock futures.  We will see how well this move is confirmed by the ETF’s and the underlying bond market, especially in the face of some pent up supply that is due to hit the market now that all the bankers are back from vacation.

LQD has continued to perform okay.  It has had some inflows, though nothing like the HY ETF’s and it has really been just a trickle of inflows since the first day of the year which had a good sized inflow.  It is down slightly on the year, but on a spread basis it has done much better.  We continue to see almost no upside in owning this outright.  It just doesn’t meet the hurdle rate for institutional investors so won’t see big “real money” demand until they really decide to add exposure to financials (a big rally in financials’ bonds would help LQD outright).  So continue to play it on a spread basis, or at this stage just avoid it and see if there is a better entry opportunity.

The muni space continues to grind away.  BABS, our favourite, has lagged MUB, which has had a great start to the year.  With MUB’s up 2.7% outright, and over 4% on a hedged basis, it is time to stop adding and even take some profits (you made over a year of carry in a week).  The premium is too high now, and the ETF at least hasn’t really attracted enough new money to create shares.  So we would not add MUB, but do still like BABS, particularly on a hedged basis.

With HY17 up a ½ point already, IG17 2.5 bps tighter, and Main an impressive 6 bps tighter and trading at 174.5, we should see a strong open in the ETF’s.  If we don’t get that strong open, I think it is a signal to short the credit ETF’s (since Italian and Spanish bonds remain under pressure) rather than an ETF buying opportunity.