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Short High Yield Credit As Oil Prices Plummet

Our Markets Take

The widespread destruction in the WTI oil price curve represents a very tangible sign of dysfunction. As a result, our High Conviction short idea remains to iShares iBoxx High Yield Corporate Bond ETF (HYG) which looks vulnerable to downward price pressure as bankruptcies in the oil industry tick up. We expect rising volatility which puts overall credit quality at risk in the sector. The FED cannot or should not buy all bonds. Multi-asset and intra-stock correlations remain quite high. This continues to signal a high degree of macro and sector uncertainty. Economic protests add to uncertainty as concerns around renewed spiking and virus damage creates policy uncertainty.

Our Top Ideas to play drop in Oil

  • iShares iBoxx High Yield Corporate Bond ETF (HYG) puts and spreads look like very solid approach. While there continues to be a multitude that believe the FED can buy every high yield bond, we see the FED “put” to liquidity not price. I don’t think even speculators want to the FED to be buying every bond. iShares iBoxx High Yield Corporate Bond ETF (HYG) puts are a conviction view for us. We have iShares iBoxx High Yield Corporate Bond ETF (HYG) implied vol as 30% cheap to forecast (89th percentile). 2 month Skew has decreased since the Fed announcement and is now fair versus its trailing one year mean. iShares iBoxx High Yield Corporate Bond ETF (HYG) puts look to have re-established defensive potential.
  • VIX looks to be testing 50 level again. If it goes through the 43 level this time it could be reestablishing a 43 to 50 range until meaningful more optimistic economic news is received. The news of increased economic dissatisfaction demonstrations raises the specter of a less than effective virus response from policymakers. Not that its clear what State’s re-opening schedule is optimal but the controversy and politicization of this process can lead to greater market uncertainty.
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