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French to English: Financial / Credit Markets

French source text

English translation
April was very positive for the credit market paying no heed to the rise in bond yields and commodity prices. This movement brought the iTraxx Europe 5 year index to under 28 bp and the high-yield issuers index to under 230 bp, namely a tightening of 5 and 27 bp respectively. US and now European numbers clearly underscore the strength of the economic environment. This macro-economic view is confirmed by a very positive Q1 earnings season. Of those already published, 70% of S&P 500 earnings have come in above expectations and the outlook for earnings per share growth has been revised upwards from 11% to 12.5%.

Against this positive background, the launching of structured products and the hedging of short positions was particularly good news for the CDS market, while the bond market suffered from a lack of liquidity.

During April, management continued to build up the portfolio initially favouring the sale of protection so as to generate carry. The high-yield securities portfolio the most lucrative was first and foremost weighted towards the short end of the curve. Given the relatively tight levels, the strategy on these issuers is to cut the holding period so as to be in a position to benefit from a medium term trend of widening spreads. Investments in high quality securities were generally focussed on the 5, 7 and 10 year areas. At the end of April, the average duration of the portfolio was around 5 years.

Our sector allocation is weighted towards cyclical sectors such as capital goods and cyclical consumption as well as telecommunications operators. This latter sector is clearly more exposed to competition and regulatory pressures, but we feel that the above-average credit spreads offered already reflect these uncertainties.
Lastly, the subordinated bank debt sector offers an attractive premium for issuers with credit quality rarely having been so good.

Of the buying protection strategies we will continue to have a basket in the media technology sector on issuers that we feel to be overpriced such as Hewlett Packard at 19 bp, IBM at 16 bp and Reuters at 28 bp.

Looking forward, we remain confident about the medium term trend given the strong fundamentals even though we feel the market may be in for a correction following its strong performance. Given this, the pace of investment has been reined in to conserve resources.

© T Leary 2020

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