Monday, August 24, 2015

URGENT TRADEX SHORT HY UPDATE: Global market rout gives investors another chance to short HY bonds

Warning signs have been flashing for quite some time now in the HY market.  Investors are seeing, in many cases, one to three years of gains in their underperforming hedge funds wiped out in days.  This global market rout may be one last warning sign for investors to get out of their risky high yield bonds with only a few bumps and bruises and to GET SHORT.  Macroeconomic headwinds and questionable fundamentals in these habitually underperforming companies will make new issuances and refinancings increasingly difficult, if not impossible.  Poor operating results over the last several years have not limited these companies’ ability to lever up, but we think that time is coming to an end.  Liquidity in the overall high yield market has tightened and shows continuing signs of erosion. All of these dynamics combined make right now the opportune time to consider investing in the Tradex Short-Biased High Yield strategy.

Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500

@Tradex_Global

Sunday, August 23, 2015

FLASH UPDATE: Global growth concerns add to uncertainty surrounding Fed liftoff

TRV Mid-Month Commentary | August 2015


Comment:
The news cycle for the first half of August has been dominated by global growth concerns following the People’s Bank of China’s surprise decision to devalue the Yuan that resulted in the largest one day decline in two decades. Global markets largely saw the move as a play to increase export activity, spurring fears of a decline in global growth that set the tone for a risk-off mentality.

Global economic concerns have also caused investors to contemplate whether the Fed will move in September, and July’s change in Non-Farm Payrolls provided little guidance to potential Fed policy as the numbers came in at expectations. We note that the market has turned more bearish on a September hike as the Fed Funds futures market implies a 36% probability of such an occurrence[1], down from near 50% a few weeks ago. Although the Fed’s most recent Dot Plot[2] implies two hikes in 2015, we are less certain of this outcome following recent news.  Despite the uncertainty surrounding a September hike, 10yr yields managed to increase 2 bps to 2.18 while 5yr yields increased 7bps resulting in a 5bp 10/5 bear flattener.

In this backdrop, securitized credit faced headwinds as spreads were pushed wider and weaker credits underperformed due to a steepening of the credit curve.  While weakened sentiment regarding the global economy has had an impact on the credit instruments, the US housing and economic fundamentals remain supportive.  We view these dips as buying opportunities with the expectation that fundamentals will ultimately drive spreads tighter.  At current levels, there is value in last cash flow tranches of GSE credit risk transfer bonds as well as in BBB-rated single family rental securitizations.  Non-traditional ABS such as aircraft, NPLs, and marketplace lending transactions offer incremental yield and have weathered the recent volatility quite well due to strong investor demand.

Recent market action and the risk-off sentiment has likewise affected hedged return on the mortgage basis: hedged with 5yr Treasuries, premium 4.0s widened 2 ticks, while widening 8 and 5 ticks versus the 10yr and Treasury Curve hedges, respectively. Premium 4.5s, however, performed poorly against bullet and curve hedges having widened between 7 and 10 ticks. Since August 1st, the basis has cheapened between 5 and 9 ticks owing to deteriorating rolls, low level of rates and diminishing bank, oversea and REIT demand. We consider the timing may perhaps be ripe for a tactical long position, but our long-term view leans much more bearish. We tread cautiously at this juncture and look to September for clarity.

Since the end of June, we note that the mortgage rate has fallen 27 bps and that the refi index continues to climb from its June low. That said, we expect a 5-10% decline in prepayments from July to August on lower turnover and refi activity, particularly for cuspy 3.5s and 4.0s of 2013 & 2014. While this sounds counterintuitive, it is important to mention that the Refi Index is a leading indicator and refi applications take some time to work its way through the pipeline. Over the last couple of months, option-adjusted spreads on IOs and Inverse IOs have remained relatively stable. However, a surprise decision from the Fed could temporarily cause spreads to dislocate and provide advantageous volatility.

As September looms, we continue to find pockets of opportunity in our markets but remain cautious due to potential knee-jerk reactions. Overall, we think the coming months will yield abundant opportunity.

Regards,

Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Thursday, August 13, 2015

Thank you for your support!

Typically I try to keep things very professional on this blog, but since social media has taken over as the primary form of communication for so many, I felt that it was appropriate to "blog" my thanks in a very personal way.  As many of you know, today - August 13th - is a bittersweet day for me.  10 years ago my life changed in the blink of an eye when I broke my neck.  There are still moments of jealousy, where I feel that maybe I've missed out on something...but the happiness in my normalcy far outweighs those feelings.  There are still moments of guilt, where I feel I could do more, if only...but the sense of accomplishment that I have allows me to maintain a true sense of relativity.  There are still moments of fear that this may be "it", but the understanding that my "it" is amazing wakes me with a smile every day.  My happiness, my sense of accomplishment and my perfect life are all directly attributable to my amazing support system that has never wavered.  That support system has never allowed me to make an excuse for anything, and has never compelled me to want to.  That support system keeps my "moments" fleeting.  Thank you to my family, friends, colleagues, co-workers and investors for supporting me always.  I promise to continue to strive for success every day and to make you all proud.

Thank you,
Richard

Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Thursday, August 6, 2015

FLASH UPDATE: Porfiting from the impending decline in Fed's Agency MBS Buying

As Treasuries begin to refocus on the Fed’s initiation of policy tightening, it is prudent to also consider the effects of the inevitable deceleration in its MBS reinvestment program.  While the Fed has already stopped its QE3 purchases of $40 billion per month in AGY MBS, they are still currently reinvesting principal and interest payments from their MBS portfolio into new securities.  The reinvestment program results in $20 to $30 billion in monthly MBS purchases.  While our expectation is that the Fed will not liquidate their portfolio of AGY MBS, we expect them to transition towards run-off mode by ceasing to reinvest payments of principal and interest.

Shorting the basis is one of the trades we are eyeing as part of our AGY MBS relative value trading strategy.  We anticipate that over time the basis will revert towards pre-crisis levels as the Fed, who is currently by far the largest single buyer of MBS, exits the market as part of a reduction in quantitative easing.  Our view is that the Fed’s exit is not yet priced in and we examine an opportunity to earn outsized returns using a tactical short that will benefit from a retracement. 




At present, the AGY MBS basis sits near historically tight levels due to the influence of many supportive factors (Fed purchases, limited available float, low rate volatility, tight credit conditions/benign issuance). These factors are reversing course and will push the basis wider.  While higher regulatory hurdles have impeded loan origination over the last few years, rising interest rates will begin to serve as an incentive for banks to increase their lending activities.  The combination of increasing supply, reduced Fed buying, and rising volatility should put pressure on mortgage spreads.     



The spread between AGY MBS and Treasuries, which currently sits near 75bps, is markedly tighter than its pre-crisis average of 125bps. The chart below illustrates the trade’s expected return assuming the spread retraces 50% of the gap.  For perspective, this 25 basis point move would be smaller in magnitude and could occur in a like timeframe as the 35bp widening experienced over a six-week period during the summer 2013 taper tantrum. 



Please contact us if you would like to hear more about our view on this trade thesis or our other thematic ideas.

Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

Tuesday, August 4, 2015

Tradex Global Short-Biased High Yield Fund Ranked #1 Fixed Income - HY Fund in June by BarclayHedge


This fund was ranked based on the data in Barclay Hedge's hedge fund database