By Louis Gargour, CIO of LNG Capital and Europa Credit Fund
After the month of June markets have been significantly more constructive, key themes include a re-evaluation of credit, a decoupling of interest-rate risk from credit and equity risk, and a market which is more accepting of the Fed comments concerning the anticipated tapering of security buybacks / monetary easing.
The new issue market in Europe is open again, with high-yield issuers doing well in the secondary and investment-grade issuers generally pricing to perfection leaving very little on the table. Volatility has abated for the moment, however we do expect the markets to begin to trade in a choppy fashion in the weeks and months leading up to German elections in the fall. Crossover Index which is a good benchmark for general credit market sentiment is trading below 400 basis points with the tight for the year being 367 over on the 21st of May. (See graph below)
Positioning and Outlook
Hedges have generally cost money as the market continues to rally. We have increased the long high-yield book relative to the short high-yield book and we remain constructive on special situations, with a number of opportunities in corporate debt across Europe continuing to present themselves as a result of inappropriate balance sheets, macroeconomic factors, sovereign dislocations, and errors in management. We continue to underweight relative value in the portfolio as general market tightening means that only trades weighted to the bullish side will make money. We have hedged out a portion of interest-rate risk in the portfolio and continue to believe that US bond yields will continue to rise as the year progresses, therefore necessitating the minimization of portfolio interest rate risk.
Key portfolio characteristics :
Net exposure: Low at 43.7%
Gross exposure: Witheld
Duration: Moderate at 2.6 years
Average rating: Moderate at BB
Net current yield: Attractive at 14%
P&L: Approximately 2.3% MTD and 10% YTD