Debt Investors `Poorly Compensated' for Volatility, Barclays Capital Says
Credit investors are being “poorly compensated” for price volatility, sideling buyers until the fourth quarter, according to analysts at Barclays Capital.
Three-month volatility on the Markit iTraxx Europe Index of credit-default swaps on investment-grade companies has more than doubled to 84 percent since April, according to data compiled by Bloomberg, while the benchmark’s level has risen 60 percent. Greater volatility, the rate at which prices move up or down, means investors can make or lose more money than usual.
“Spreads are wider than they were but volatility has gone through the roof,” Barclays Capital credit strategist Aziz Sunderji said in an interview. “That’s keeping real-money investors who are sitting on piles of cash on the sidelines.”
Investor sentiment has been dented by “very weak” sales of new homes in the U.S. and “dovish” central bank statements, casting doubt on the strength of the recovery, London-based Sunderji said. The U.S. economy grew at a 2.7 percent annual rate in the first quarter, less than previously calculated, according to Commerce Department data.
The Markit iTraxx Europe index reached a two-week high of 130.9 basis points on June 25, according to JPMorgan Chase & Co. The gauge fell 2.5 basis points today to 123.5. The index is near the lowest since July 2008 when volatility is taken into account, Sunderji said.
“This is hardly an appealing environment for risk taking,” Sunderji said. “There are few catalysts for a sustained rally over the summer.”
Sentiment should improve in the fourth quarter as volatility declines and investors start to use the cash they hold, according to Sunderji.
“We expect volatility to subside, liquidity to increase and that will draw real-money investors into the market,” he said. “By then we may also have more clarity on issues such as bank funding and regulation.”
Credit-default swaps are contracts based on bonds and loans that are used to speculate on a company’s ability to repay debt. An increase indicates deterioration in the perception of credit quality; a decline, the opposite.
A basis point on a credit-default swap contract protecting $10 million of debt is equivalent to $1,000 a year.