Halister News

(Bloomberg) -- The next wave in credit losses could materialize in the investment grade credit space, Peter Tchir, head of macro strategy at Brean Capital LLC writes in a client note.

• Losses in IG impact stocks far more than the high yield problems the market has been negotiating for the past two years
• This may not be a result of investment grade default risk, but concern that positioning, including buying ahead of the ECB, has left investors exposed to more mark-to-market risk than they were truly prepared for
  • ‘Safe’ assets are positioned too heavily, while ‘risky’ assets are positioned relatively light
  • Recommends being short IG bonds with a rate hedge (short LQD with long treasuries)
• Another concern is the stock buyout blackout period; if IG is under pressure, the trade of selling bonds to fund stock buybacks might not play out quite as well as it has been
• Suggests adding some risk here, having de-risked ahead of Brexit vote; cautiously optimistic that mkt can “muddle through” with positioning and central banks offering some support
  • But longer-term, investors’ mark to market risk is larger than planned, while risk tolerance may be lower than believed – causing a glut of selling into a market more fragile than it appears