Updated: 11/20/2018 10:10
Hyip Monitor
skybridge relies on high yield bonds
SkyBridge Capital relies on US corporate loans to protect against any recession, high yield bonds as a solution
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SkyBridge Capital relies on US corporate loans to protect against any recession, high yield bonds as a solution

The biggest risk to the market is China, "and how destructive it can be" in emerging markets, SkyBridge partner and senior portfolio manager Troy Gayeski said at the Greenwich Economic Forum on Friday. But, in order to find the most dangerous places elsewhere, he said that investors should look for areas that "built up the most leverage since the crisis," he said.

Emerging markets fall into this group, but in the US, high yield bonds and borrowed loans are a key area, he said.

"Our largest short position right now is in high yield, and it's not because we think we're going to make money this year or next year," he said. "It's to protect against the eventual recession or [a] surprise recession."

SkyBridge's biggest hedging is rates against corporate bonds and high yield bonds within the iShares iBoxx $ High Yield Corporate Bond investment fund (ticker: HYG) or using credit defaults, he said.

The High Yield ETF fell 2.5% this month to $83.05, dropping in each of the last seven trading sessions.

"If you’re looking to put on [a] relative cheap short position, it’s hard to figure out how you lose money given how tight spreads are," said Gayeski.

He refers to the extra yield that investors require to hold corporate bonds of higher risk, not Treasury debt. According to Bloomberg Barclays Indices, six weeks ago, the spreads on high yield bonds were very narrow compared to the Treasuries, which were from the financial crisis. Since then, they have expanded to the maximum of April 2017.

According to him, corporations in the United States sharply reduced their borrowing during 2011. "The end of 11 was probably the best buying opportunity for high yield bonds, because even if we had a recession in bonds, you still would've made money," said Gayeski.

But then the companies went on borrowing, he said, increasing net debt relative to earnings.

The flow of money aimed at an asset class, as investors were looking for the relative security of corporate debt after the financial crisis, prompting companies to borrow at lower and lower interest rates. Corporations have capitalized low interest rates, loading cheap money for buying back shares or acquiring other companies.

Because, at least in 2013, when the Federal Reserve began to make noise about raising interest rates, investors were worried about the excess of too expensive corporate bonds. But they could not stop buying them and that new problems continue.

This year, problems have become more noticeable as interest rates have increased. The high debt burden accumulated in the last credit boom finally led to corporate death, as Toys "R" Us and other buyouts were filed for bankruptcy. Rising rates reduces the price of existing securities with a fixed income, so bonds begin to look like they are guaranteed to lose money.

And Gayesky said: "You are starting to see fallen angels," because rating companies downgrade investment grade companies to undesirable trading. Investors sell their high yield bonds to investment companies such as General Electric (GE) and Anheuser-Busch InBev (BUD).

"GE at this point is probably more of a long," Gayeski said. "You've just got to wait it out."

His comment was repeated by the Guggenheim Partners Global Chief Investment Officer, Scott Minerd, who said that the sale at GE was "not an isolated event" and that other investment grade corporate loans would follow. "The slide and collapse in investment-grade debt has begun," he wrote.

If he's right, the big idea of SkyBridge will serve them well.

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