Long Ideas/Overweight Recommendations
- Consumer Staples Select Sector SPDR Fund (XLP)
- Health Care Select Sector SPDR Fund (XLV)
- iShares National AMT-Free Muni Bond ETF (MUB)
- Vanguard Extended Duration Treasury ETF (EDV)
- iShares 20+ Year Treasury Bond ETF (TLT)
Short Ideas/Underweight Recommendations
- SPDR S&P Regional Banking ETF (KRE)
- iShares Russell 2000 ETF (IWM)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
Illiquidity Risk Remains in the Junk Bond Market: Consistent with our #Quad4 and #Bubbles themes – which calls for an allocation to relative safety over high yield/junk in the domestic fixed income market – spreads continue to widen in the corporate bond space.
On a WoW basis, OAS on HY USD bonds backed up +19bps yesterday and are now +80bps WoW and +150bps MoM to cycle-wides of 603bps. Obviously, as we have detailed extensively, the energy sector continues to lead declines in the HY USD bond market. Specifically, OAS in this space backed up +23bps yesterday and are now +155bps WoW and +397bps MoM.
Source: Bloomberg L.P.
Not surprisingly, given the dour state of secondary bond market liquidity, emerging market USD debt is selling off as well, with OAS having backed up +81bps WoW and +142bps MoM to cycle-wides of 483bps.
Source: Bloomberg L.P.
In the following two charts, which we have sourced from our presentation on Emerging Markets yesterday (email to obtain the replay), we detail the state of secondary bond market liquidity in the U.S. and specifically as it pertains to EM debt. Needless to say, there is a pervasive lack of liquidity in these asset classes and the crowded nature of these trades amid an era of ZIRP dramatically amplifies the risk of what we have seen thus far – i.e. reflexive selling.
All told, we continue to think this negative re-rating for HY and EM USD debt is likely to have a substantial impact on broader “risk assets” to the extent the broad-base de-risking of this asset class continues.
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
Early Look: Money Man (12/15)
#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.
Moscow, We Have a Problem (12/16)
#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.
#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets.
The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends.
Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.