Odey’s Bond: Savage recession priced into US high yield

High yield and investment grade US credit are the cheapest asset classes in the market as they are discounting a “savage recession”, said Odey’s macro strategist Tim Bond.

Bond has been buying into US credit ahead of the launch this week of his Odey Odyssey global macro hedge fund . The UCITS IV, Dublin-domiciled portfolio is similar to the RADAR fund he developed at BarCap.

It invests according to econometric modelling, but with a “common sense overlay”. Turnover in the fund will be higher to give it a more interesting risk profile, the manager said.

While running the fund as a paper portfolio, Bond said he has managed to “dodge the worst of the bullets” this year, with the long position in US high yield key to performance.

“High yield is discounting a very deep recession. You would have to see a full blown crisis in Europe for that to happen,” he said.

“Businesses are not actually very highly leveraged, they are behaving sensibly, and corporates should really be trading at tight spreads. Investment grade credit, excluding financials, and junk bonds spreads in the US are discounting a very bad scenario in Europe. Relative to their fair value, these asset classes are the cheapest.”

Meanwhile, Bond expects government bond yields to converge downwards and warned investors will be “starved of yield” if this happens. “Operation Twist is going to force people out along the credit curve,” he said.

He has been shorting pro-cyclical currencies such as the Australian dollar as a hedge against economic stress, preferring to own the US dollar as a safe haven. He is also very negative on the euro.

“Currencies have not reflected enough of the economic weakness we have seen, while high yield over-discounts it,” he said.

Bond has been running the model portfolio with about 30% in high yield, while currency shorts make up 30%. It has also had a smaller weighting to the “ultimate safe haven” US large caps, and some short positions on European indices.

He has very little in equities overall however, believing they are not yet cheap enough to justify their level of risk.

“In June and July it became obvious that the world had slowed more than everyone, including myself, was expecting earlier in the year. Growth had slowed to the point where there was a 50/50 chance of recession. That persuaded me that it was not a very good idea to have any risk on the table at all,” he said.

“I would like equities to offer me a little bit more risk premia to cover the downside risks we are seeing around us at the moment.”

Bond created the investment process and oversaw asset allocation on BarCap's RADAR fund, and was also the principal author of the Barclays Equity Gilt Study. He spent 12 years with the firm before joining Crispin Odey's boutique late last year.