Number two on that list of recommendations was taking a long position in the high yield market by shorting CDX HY Series 19, an index of credit insurance on high-yield debt.
Today, Goldman is already closing the trade recommendation, after only a single day of trading in the new year.
The trade was actually originally introduced on November 19 and re-iterated as a "top trade" for 2013 in a note to Goldman clients on December 4. Since then, the CDX HY Series 19 index has fallen precipitously:
Goldman credit strategists, led by Charles Himmelberg, say that despite the fact that they are closing out the trade recommendation, it's still their "highest conviction call in 2013."
In a note today, Himmelberg writes:
We are closing our top trade #2, long CDX HY, with a potential profit of 300bp since its inception on December 4th. This top trade, opened at a spread of 500bp on December 4th, is an extension of a tactical trade opened at 564bp on November 19 (see “Sell-off presents good entry for CDX HY”, The Credit Line, November 19, 2012). As of yesterday's close, the spread on the on-the-run CDX HY index stands at 439bp (see Exhibit 1).
While our top trade has hit its target somewhat sooner than we had expected, HY remains our highest conviction call in 2013. At 439bp, synthetic HY spreads are trading inside levels last seen in the first quarter of 2011. This has clearly eroded valuations, but we still expect HY spreads (both in the cash and synthetic markets) to grind tighter this year, especially once we are past the fiscal headwinds of the first quarter.
Despite tighter spreads, HY is the “least bad” choice in what remains a bleak opportunity set in fixed income markets. Virtually all of the pillars underlying our constructive view on HY remain intact, recent rally notwithstanding.
Those "pillars" referred to by Himmelberg include low fundamental default risk, low recession risk despite the fiscal headwinds, lower tail risk from the European debt crisis, and the ongoing "search for yield" theme playing out in global fixed income markets.
Himmelberg concludes: " In sum, while we are closing these trades, we still like the theme, and we will likely view any sell-off during the forthcoming debt ceiling negotiations as an opportunity to add risk in CDX HY, just as we did at the outset of the fiscal cliff negotiations."
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