Investors are increasing their exposure to U.S. corporate bonds as they take advantage of a surge in supply, but some say conflicting opinions about the economy are creating both long and short trading opportunities.
The belief that the Federal Reserve may be nearing the end of its aggressive interest rate hikes has injected new life into corporate bonds, with credit spreads on both the investment-grade and junk-rated asset class tightening after widening sharply last year. Spreads indicate the premium investors demand to hold corporate bonds rather than safer government debt.
That has encouraged a rush of bond issuance, for now mostly in the investment-grade primary market, and investor appetite for those new issues. However, some investors expect credit spreads may widen again to reflect a recession. And that is also providing an opportunity for those looking to build short positions as companies' ability to pay their debts may deteriorate.
"For a long period, shorting credit was not an interesting trade," said Paul Goldschmid, co-portfolio manager at credit hedge fund King Street, which manages $22 billion. Goldschmid cited low levels of credit downgrades, liquidity issues and bankruptcies for the lack of interesting opportunities.
King Street grew its cash levels last year, but now it's putting cash to work by going short and long on credit, Goldschmid said. As companies' fundamentals deteriorate in the coming months, he expects to reduce shorts that were profitable and get longer.. In the first week of 2023, total U.S.
Six new junk bonds have been sold for $4.725 billion so far this month, compared to just three for $2.12 billion in the whole of December, according to Informa data, reflecting the reopening of a junk bond primary market that saw declining new issue volumes towards the end of 2022.
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