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Extend duration, take out dollars, stay defensive
admin | July 31, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The US Treasury 10-year retested historic low yields as the Fed re-committed to a dovish stance, providing a continued backstop to credit markets. IG corporate bond spreads are re-approaching the tight levels they tested back in the third week of February, immediately prior to the impact of the Covid-19 crisis. At this point it’s unwise for investors to wantonly chase lower-rated credit in an attempt to bolster overall yields, and should instead take a defensive approach to corporate credit. Opportunities exist in small extension trades into “long” 10-year notes with lower dollar price to take advantage of the still steep 10s/20s / 10s/30s curves. These provide a window for investors to divest higher dollar issues in aging 9-10-year notes and take out large amounts of cash to reinvest elsewhere.
There are several actionable market opportunities for investors to execute this trading strategy, as well as graphical representations of the global reach for yield that is stressing market valuation for lower rated credit. The trading scenarios that we highlight are currently available, but are subject to a call to the APS trading desk. This strategy is by no means limited to these suggestions, but subject to availability as bonds are thinly offered in this part of the curve with corporate yield highly sought after in recent trading sessions.
Exhibit 1. Global Negative Yielding Assets Re-approaching Historic Highs
Source: Bloomberg/Barclays Index, Amherst Pierpont Securities
Example 1: Marsh & McLennan (MMC) – Small Extension Swap, Take Out >$15 Points (works on 5 million, contact APS for details)
SELL: MMC 4.375% 3/29 +89/10YR ($123.14)
BUY: MMC 2.25% 11/30 +92/10YR ($107.34)
Issuer: Marsh & McLennan (MMC)
CUSIP: 571748BG6 vs 571748BN1
AMT OUTSTANDING: $1.5 billion vs $750 million
Extend Duration: 7.148 vs 9.035 (extend 1.89)
RATING: Baa1/A-/A-
Both Global Deals
Example 2: UDR Inc. (UDR) – Small Extension Swap, Take Out >$10 Points (works on 5 million, contact APS for details)
SELL: UDR 3.20% 1/30 +120/10YR ($112.37)
BUY: UDR 2.10% 8/32 +135/10YR ($102.22)
Issuer: UDR Inc. (UDR)
CUSIP: 90265EAQ3 vs 90265EAT7
AMT OUTSTANDING: $600 million vs $400 million
Extend Duration: 8.11 vs 10.48 (extend 2.37)
RATING: Baa1/BBB+
Both Global Deals
Exhibit 2. Treasury and IG Corporate Yield Curves testing historic lows
Source: Bloomberg/Barclays Indices, Amherst Pierpont Securities
Exhibit 3. IG Corporate Bond Spreads suggest technical extension trades vs recent tights
Source: Bloomberg/Barclays Indices, Amherst Pierpont Securities
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