State of Credit markets now and in the future?

Not a credit trader, but trying to better understand career prospects in this area and what it holds in the future.

1) My understanding is that single name CDS is only pretty much active for financials and some sovereigns. What about credit index/credit options? How liquid are they now?

2) In a rising rate environment and after corporates issued lots of debt, how does life change for IG/HY trader?

3) On the topic of tech, it seems that distressed/HY/IG/structured are not likely to be disrupted. What about CDX or iTraxx? Will they start to be more dominated by electronic firms and sell side desks shrink?

4) If one is just trading credit indices, does he/she need to know accounting or credit analysis?

Thanks

Comments (36)

Jan 6, 2018

I would be interested to know the answers to these questions with a distinction between IG and HY.

Jan 7, 2018
  1. The indices are liquid, index options i don't really know i suppose liquidity has dried up since financial crisis
  2. There is a lot of supply in the market now, spreads tight credit vol is low so probably not a lot of activity/opportunities
  3. That's like saying a does an equity index option trader need to known fundamental analysis, i would say no. A CDS is a deep out of the money put option
Jan 9, 2018

Are you saying this as someone who has worked on a sellside credit derivative desk before?

Jan 11, 2018

Sure, i work on a credit derivatives desk - among other products

Jan 17, 2018

@long_vega" Whats the effect of automation and electronification on various credit desks? What is the future business for market makers in these fields?

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Feb 10, 2018

I'm not a trader but I am involved in these markets on the buyside:

1) Who told you single names are dead??? we trade those all day. Credit indices (CDX) and CDX options also remain liquid as far as I know

2)

3) That's why the bespoke market has gotten bigger.
https://www.bloomberg.com/news/articles/2017-09-26...
4) I dont think so

Feb 10, 2018

On the contrary, going forward leveraged finance should be the most robust business as our economy picks up.

KICKIN ASS AND TAKING NAMES

Feb 10, 2018

As long as you perform well, you will be fine for FT.

Feb 10, 2018

Macro picture slowing things down for sure though still some action - plenty of companies have no choice but to go to the market for financing and many want to, but are holding out, often at bank's advice, hoping for picture to clear up a bit. As the picture at least settles down a bit, if it does, then the market will improve; the issue isn't really availability of capital as I see it as much as uncertainty which constrains action. Unfortunately both have same effect.

And yeah, market was hot until about 2 months ago, and especially hit a wall over last 3-4 weeks, but credit markets are often like that and has been the same since 07 - windows of large issuance followed by quiet periods.

On your internship - do your best to impress, even if the team isn't able to commit to hire you back they should still (depending on bank) be able to recommend you be hired even if they aren't sure they will have space for you next year.

Feb 10, 2018

And the loan market is still relatively robust. Banks are still looking to commit to deals. Unless there's a substantial meltdown in the next couple of months, Lev Fin will be hiring.

Feb 10, 2018

hopefully, this will translate into severely reduced hours and then the credit markets flood open exactly at the end of the summer. but one can only hope.

Feb 10, 2018

Dunno about deals, but the credit markets are now slowly improving after the correction. The problem is that investors are skittish, split between improving fundamentals and generally nervous expectations of possible double dips. So they ovverreact to any news, be it good or bad.

Feb 10, 2018

refi refi refi
2011 2012

Feb 10, 2018

Look into the maturity cliff of LBO debt from the boom. Companies refinanced and launched new financing while the markets were good, and are now delaying and deferring while the markets are softer but sooner or later a lot of that debt is going to need to get refinanced.

Feb 10, 2018

Great insight thanks

Feb 10, 2018

Well a bit of the chicken/egg argument in whether the existance of the shale plays (bakken/ef/permian/marcellus/utica etc) drove the need for credit to further develop OFS technologies or that the credit facilities made the technology R&D possible which then made those plays economic. Also would hesitate in saying that the US will be Europe's energy savior given that we can't export crude... If you look on a longer-term scale like 2018 then yea definitely probably not a 2014/15 event. Aside from that, awesome write up.

Feb 10, 2018
ResearchingStuff:

Well a bit of the chicken/egg argument in whether the existance of the shale plays (bakken/ef/permian/marcellus/utica etc) drove the need for credit to further develop OFS technologies or that the credit facilities made the technology R&D possible which then made those plays economic. Also would hesitate in saying that the US will be Europe's energy savior given that we can't export crude... If you look on a longer-term scale like 2018 then yea definitely probably not a 2014/15 event. Aside from that, awesome write up.

Oh absolutely - its going to be a long and slow trudge towards becoming a major export - a lot of US companies benefit from the energy cost advantage, and I'm sure they wouldn't want to see feedstock spreads narrow for them at all.

Feb 10, 2018

Back in the 80s, the then newly created "junk bonds" were used by Steve Wynn to finance the constructions of The Mirage, the original mega casino resort that would not have been done on that grand scale otherwise,. The Mirage proved so successful that Wynn was able to pay back all the borrowed money in just a few years and went on to build the Treasure Island, Bellagio etc using the same formula. Others soon followed suit and just like that Las Vegas was transformed into this surreal adults playground in the desert that it is. As a Vegas connoisseur, I certainly appreciate the wonder of the high yield credit market.

It is remarkable that the term high yield seems like an oxymoron in the U.S recently given how much the yield on below investment grade bonds have gone done.

Feb 10, 2018

It's Lithuania*. Wouldn't have mentioned the typo, but it's a country's name so I thought it's appropriate. Good article nonetheless, although I don't agree with some bits.

Feb 10, 2018
TheFamousTrader:

It's Lithuania*. Wouldn't have mentioned the typo, but it's a country's name so I thought it's appropriate. Good article nonetheless, although I don't agree with some bits.

Ooops - fat finger :/

Don't want to disrespect that region, lot of respect for it

Feb 10, 2018

A best case scenario would be the U.S+other secular democracies+U.S allies exporting LNG to Europe+Europe future fracking for weakening Russia's grip. I wouldn't take it as a base case scenario.

Feb 10, 2018

great write up +1

Feb 10, 2018

excellent writeup

Progress is impossible without change...

Feb 10, 2018

Hurting Russia more would be the possible slowing of yield-hungry foreign money inflows they've had in the last decade. Paul Smith, an equity strategist at Deutsche Bank in London has advocated removing the country from the global equity indexes (currently Russia's weighting in the MSCI EM Index is 4.9 %).

Feb 10, 2018
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