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February 2021 | Issue 231
Early 2021 moves open up CLO and credit curve dislocations
Sayed Kadiri headshot
Sayed Kadiri
Fund managers are keeping a close watch on credit curves as sharp moves since the start of December have forced relative value to shift between corporate bonds, CDS, CLOs and loans. This has put CDS curve steepeners in focus but, conversely, CLO flattening appears likely.
Loans have rallied off the back of renewed appetite for floating rate paper this year and this has been followed to an extent by CLOs. But five-year US and European credit indices have widened a touch this year and a London-based credit hedge fund manager says that it is prioritising curve trades to capitalise on dislocations.
In one example, five-year iTraxx Crossover widened from 251.32 basis points on 1 December to 259.86bp on 26 January. In the same period, three-year Crossover tightened from 201.35bp to 194.88bp.
Furthermore, the fund manager points to the fact that five-year US and European indices, across investment grade and high yield, are all steeper than one and three months ago. However, iTraxx Europe and CDX NA IG are flatter than a year ago.
European IG credit curve
Source: Citi Research, IHS Markit
Citi’s credit strategists had advocated an iTraxx steepener trade in late November, reasoning that in a bear market spreads will widen more in proportion to curves flattening, and, in a rally, spreads will tighten less.
Curves are also steepening in the CLO market with static US CLO triple As pricing at 90-103bp in January while five-year deals are printing at 124-137bp. But the picture is blurred by manager influence.
“CLO curves are steepening on a quality and yield basis,” says Serhan Secmen, head of structured credit investments at Napier Park Global Capital. He says CLO managers are being re-tiered based on their 2020 performance and this means deals with similar tenors are, at times, pricing apart. “It’s no longer a defined tier one, two and three system, which means CLO spreads are not fitting neatly into bands,” he says.
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Global credit funds & CLO's
February 2021
| Issue 231
Published in London & New York.
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