Junk Contracts at 18-Month High as ETF Gets $2 Billion: Options
By Callie Bost
(Bloomberg) — February?s resurgence in appetite for risky
assets has options traders seeing value in a popular product
derived from the lowest-rated debt in credit markets.
Bullish options on the iShares iBoxx $ High Yield Corporate
Bond exchange-traded fund cost around the most since August 2013
relative to bearish ones, six-month data compiled by Bloomberg
show. Shares of the fund, known by its ticker HYG, have
rebounded 5.7 percent since dropping to the lowest level in more
than two years Dec. 16.
More than $2 billion of fresh cash has poured into HYG
during six straight weeks of inflows, sending its market value
to an all-time high. The ETF has benefited as government-debt
yields worldwide remain suppressed, according to Michael Purves
at Weeden & Co.
?There are signs of life coming back into the high-yield
market,? Purves, the Greenwich, Connecticut-based chief global
strategist and head of equity derivatives research at Weeden,
said by phone. ?There?s macro-level excitement against this
backdrop of real yields and GDP growth for HYG, especially
because it was really punished last year.?
Oil Bottoming
Options predicting a 10 percent decline in HYG cost 4.5
points more than those betting on a 10 percent rebound,
according to six-month data compiled by Bloomberg.
The relationship known as skew dropped to the lowest since
August 2013 on Feb. 23. The last time skew dropped this low,
shares of HYG rallied as much as 2.5 percent in the next six
months. Traders own about 0.9 bullish options for every bearish
one, the highest call-put open interest ratio in a year.
Another fund tracking junk debt, the SPDR Barclays High
Yield Bond ETF, absorbed more than $1.2 billion in flows last
month through Feb. 26, its best month since January 2012.
Signs of a bottom in oil are reigniting interest in HYG.
Crude prices have rebounded since January, paring back some of
the commodity?s plunge since June, which reached 59 percent at
its worst point. About 9 percent of HYG?s holdings are derived
from oil and gas companies? debt, according to Bloomberg data.
?It seems to me that most of this optimism is about the
prospects of the energy component,? Jim Dunigan, chief
investment officer at PNC Bank NA in Philadelphia, which
oversees $135 billion, said by phone. ?It?s possible that
people are making a bet that there?s some opportunity in high-
yield if there?s less stress on energy.?
Yield Hunt
Investors? search for income has intensified this year as
government-debt yields have plunged amid a tepid economic
recovery worldwide and the European Central Bank?s plans to buy
1.1 trillion euros ($1.2 trillion) in bonds.
The yield on 10-year U.S. Treasuries dropped to 1.99
percent on Friday from 2.17 percent at the end of 2014. The
yield on junk-rated companies was 6.37 percent Feb. 26,
according to data compiled by Bank of America Merrill Lynch.
Economists tracked by Bloomberg predict 10-year Treasury
yields will reach 3.2 percent by the end of 2015, barely above
where they were at the beginning of last year.
?Investors can take some confidence in the fact that
Treasury yields are not going to race to the moon,? Purves
said. ?Against that backdrop, with some stability, high-yield
should be a highly performing asset class.?
Still, oil prices trade around levels not seen since 2009
and some strategists are predicting defaults in the U.S. energy
sector will increase. On Jan. 28, UBS AG credit research
analysts revised their projection for defaults among domestic
energy companies to 15 percent over the next 12 months from a
previous forecast of 10 percent.
One out of four high-yield bonds in the U.S. energy sector
may default this year if depressed oil prices coincide with a
credit-market downturn, the analysts said.
The Chicago Board Options Exchange Volatility Index slid
4.1 percent to 13.34 Feb. 27. The gauge of Standard & Poor?s 500
Index options costs dropped 6.7 percent last week for its fourth
such consecutive decrease.
Despite gloomy forecasts for distressed oil and gas
companies, J.P. Morgan Asset Management?s James Liu remains
encouraged by companies? ability to pay back their high-yield
debt obligations. Moody?s Corp. predicts the global default rate
for speculative-grade companies will end 2015 at 2.7 percent,
below its historical average of 4.7 percent, according to a Feb.
12 statement from the ratings firm.
?We?re still at historically low default rates,? Liu, a
Chicago-based global market strategist for the J.P. Morgan Chase
& Co. division, said by phone. His firm oversees about $1.7
trillion. ?High-yield still has favorable fundamentals and I am
generally positive on it for the next couple years.?