[USD IG Overview] Pain Trades continue - 25th Jan
USD IG & Korean Paper Overview
Expected that strength will continue primarily in securities with wider spreads and good liquidity.
HYUELE is the top pick recommendation.
Since the beginning of the year, the USD credit market has seen spreads tighten further.
Following the rally at the end of last year, which brought spreads to historically low levels, market participants likely adopted a wait-and-see approach at the start of the year as stocks fell, intending to buy on dips.
However, after a brief risk-off mood, the market quickly shifted to risk-on, tightening spreads even further, which seemed to have little room left to narrow.
The current main theme in the market is a pronounced shift towards “yield searching”.
With most USD IG (Investment Grade) securities already having very low spreads, coupled with a flatter curve compared to the end of last year, very few are not experiencing negative carry.
Taking the KP market as an example, new issues at the beginning of the year were mostly priced at more than 30 basis points tighter than their initial price talks (IPT), and many rallied over 5 basis points on the first day in the secondary market.
The wider the spread, the more pronounced the strength on the first day, and vice versa for securities with lower spreads.
A prime example is the newly issued DAESEC 29 on January 23rd, issued at CT5Y +222 and opening at a mid-price of 213, rallying to 199 on the same day.
In contrast, the KORELE 27 issued on January 25th started at IPT of CT2Y +80 and was awarded at a spread of CT2Y +58.5, briefly strengthening to 53 post-issue before quickly relinquishing its gains to close at 58.
From a credit trader's perspective, the current situation is more comfortable if
1) the curve steepens quickly, or 2) there's a gradual shift to risk-off, allowing for an opportunistic buying approach.
Conversely, a flattening curve or a rapid shift to risk-on/off forces painful trades. January was a period where credit traders were almost compelled to make FOMO-driven purchases.
The question now is whether the situation will reverse to avoid immediate painful trades. As covered in the previous post, a sharp reversal in trends seems unlikely until the upcoming indicator weeks are fully digested.
HYUELE is the top pick recommendation. Even considering RoK CDS, it offers an attractive spread compared to its peer Micron, has a history of being upgraded by at least one notch during past memory semiconductor cycles, and currently has one of the most attractive spread and liquidity in the KP market.
Additionally, within the KP market, there is SAMTOT, a peer with almost the same spread as HYUELE. However, considering the increasingly apparent semiconductor cycle, it doesn't seem right for SAMTOT and HYUELE to be trading at similar spreads.
