This is from Brian Reynolds, bond analyst on Minyanville. This move today is grinding my guts out but I'm holding on, committing half of the cash I have left to the shorts on AMAT and other crap.
Corporates
Moving to underweight
A few days ago, I raised a yellow flag because I feared that longer term Agencies were at a level that may provide some competition for corporates. I thought that it would not surprise me if fixed income portfolio managers would start to favor agencies over corporates. Now, we may be starting to see that begin to happen. Yesterday, investment-grade spreads widened by a couple of basis points and high-yield widened by about 15-20 basis points. The investment-grade move was small, and comes after a string of days when spreads tightened. The high-yield move was larger, but it only brings spreads back to where they were a few weeks ago when I last cut my junk weighting. So, these moves may just be profit taking.
However, I did not like the tone of the move, and it looks like it is continuing today. Additionally, agency spreads look to be a little wider today despite a story hitting the wires that the German central bank does not intend to sell its agency holdings.
Today is a day when people are generally feeling good: we had strong economic reports, the S&P is making a move toward the upper end of its trading range, and we've even had an IPO! Given that I feel that risk levels have elevated in the last week, it makes sense to me to take somewhat less risk on a feel good day. So, I am going to take my junk weight, down from neutral to the beginning of an underweight. As usual, this is not a recommendation for people to mimic me, but I do want people to focus on whether they feel they are being compensated for the risk they are bearing. I went heavily into junk during the fourth quarter after those spreads topped the 1100 basis point mark. At a spread of under 600 basis points, you are now getting paid less to bear risk than you were 9 months ago, and I do not want to give back those gains. I would cut my investment- grade weight as well, but I have already been at a significant underweight. This leaves mortgages as the only area in fixed income that I am overweight, because they are the only major taxable sector that has seen their spreads widen this year, and because the variability of mortgage returns is usually less than that of Treasury returns (as an example, GNMA returns for July look like they will come in at about -1.0%, compared to -3.5% for Treasuries). |
