Halister News

(Bloomberg) -- Shorter-duration assets could struggle as the market has already priced in a "Fed pause," despite easy financial conditions and booming asset prices, UBS credit strategists Stephen Caprio and Matthew Mish say in a report on Wednesday.

• Credit risk remains underpriced relative to duration risk given tightness of spreads, yet credit risks aren’t receding amid weak corporate earnings, higher consumer delinquencies
  • Recommends rotating further into longer-duration U.S. IG (BBB) over HY (BB) to capitalize on 21bp yield advantage
  • Also recommends buying put options on HY ETFs given near record-lows in short-dated implied volatility
  • Risks to recommendations include greater expectations for U.S. tax reform with market now "underwhelmed with Washington politics"; a Fed that lets inflation exceed 2% target; and potential new source of HY demand from insurance cos.
• U.S. insurers may face lower capital charges to invest in HY starting in 2018, presenting upside potential and driving HY spreads even tighter
  • Sees insurers maintaining strong credit-risk aversion, likely reaching for yield by buying longer-duration assets, BBB rated U.S. IG credit and illiquid assets
  • Lower capital charges won’t “reflexively” push insurers into BB rated HY, when long-duration BBB credit is yielding more

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Kenneth Pringle, Rick Green