Scrapping the bottom-of-the-barrel for yields


It has been a profitable ride especially for Asian credit investors buying into rated and unrated high yield bonds issued by a plethora of Asian companies over the last 2 years.  Credit spreads have tightened significantly from the wides in 2008 but are still higher than the pre-2008 crisis levels.  A number of friends who have been doing well ”earning the carry” and had never sold out during the number of scares when credit spreads widened temporarily have asked me whether it’s time to exit.

I have always believed that credit trading is not trading in the real sense as it’s about getting the multi-year credit cycle correct and being lucky more often than smart. It’s also about being able to ride through a long enough period for the ‘carry’ and ‘slide’ to compensate for any ‘marked-to-market” valuation gyration loss in capital in the interim before maturity or pre-mature exit.

As such, I do not think that we will revert to the pre-2008 crisis ”Old Normal” in Asian credit spreads (*as seen in the illustration).  We are in the zone of the post-2008 crisis ”New Normal” in Asian credit spreads with perhaps another 30 b.p. tightening vis-a-vis the Credit Suisse Asian Bond Index Credit Spread Index as a reference.

But are we scrapping the bottom-of-the-barrel in this?  Just like leaving a good tip at a restaurant after an excellent meal as an appreciative diner … perhaps it will be more prudent to exit early, leaving some money on the table for others chasing yields and sleep better at night ! (*Although it is not an Asian practice to leave tips in restaurants … perhaps it might prove to be penny wise, pound foolish for those who insist in staying till the very end)



2 thoughts on “Scrapping the bottom-of-the-barrel for yields

    • The credit rally might just rally a bit more gauging from the exuberance in last 2 weeks issuances in Hong Kong & Singapore. As Isaac Newton might say: “I can calculate the movements of the heavenly bodies … but not the madness of man!”


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