By Mark Holman
Last week we concluded that the value in credit and high yield markets had moved back to compelling levels once again, and we debated the strategy of deploying some of the cash pile that we had accumulated, into some of these more ”yieldy” opportunities. I am sure that debates like this have been occurring all over the market and in most cases the conclusion would have been the same as ours, i.e. hold back on the cash deployment as the Greek situation could still worsen.
Our other conclusion though was that the latest crisis in Greece was perhaps the best flagged danger faced by the market for some considerable time, and that investors will have had plenty of time to adjust their portfolios accordingly. As a consequence, cash positions are generally considerably higher than the norm. If we combine this with the half year-end reporting date for the dealers, who as far as we could see had extremely light inventories, the technical position (which had been a drag on markets for a few months) now has all the ingredients for a sharp reversal i.e. a squeeze.
Consequently, we tried to execute a few small trades and it soon became apparent that we had underestimated this technicality. In many cases dealers were short – not just light – on inventory, hence buying bonds proved to be very challenging.
On Monday we walked into the office with a glimmer of Greek optimism and immediately bond prices jumped higher, so trading at levels that we thought were fair turned out to be virtually impossible. Monday’s move higher was a big one, but this price adjustment was one that occurred with very little traded volume behind it.
All this tells us that should a successful conclusion be reached between Greece and its creditors over the coming days then we could see a significant squeeze in credit markets based on value, fundamentals and an incredibly powerful technical position. On the other hand, should there be no solution with Greece and we walk in on Monday faced with the prospect of capital controls and likely default, then the power of Monday’s rally gives us an insight to the type of short term drop we can expect.
We have said before that should this happen, it will be a buying opportunity, but it definitely won’t feel comfortable when trying to guess the bottom and play the contrarian.
Mark Holman is CEO of TwentyFour Asset Management
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