HYG - Short HYG: High-Yield Spreads Are Likely To Widen
2024-04-12 14:42:16 ET
Summary
- Consider hedging with 3–5 year Treasuries, or housing stocks.
- Option-adjusted high-yield spreads are near all-time lows.
- Junk bonds are almost as exposed to refinancing risk as much maligned commercial real estate debt.
- Monetary policy and Treasury financing needs will pressure systemic liquidity, especially if the Fed continues QT.
In this article, I offer a trade idea: short junk bonds with put options. I also suggest a hedging strategy that should help mitigate the cost of the trade. I think this is a very low-risk trade with big potential upside. After explaining the details of the trade, I will discuss the economic assumptions that underpin my recommendation....
Short HYG: High-Yield Spreads Are Likely To Widen