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Utilities: Compression At Work

29 April 2014 by HCM

Over the last month, the hunt for yield has been on pretty much across the board. It has been particularly obvious in one sector: utilities. The performance of the peripheral names has been impressive indeed. The result is a sharp decrease of the dispersion of the higher beta names. Previously there was a group of “core” names (whose 5 year CDS is worth 60bps roughly) and an heterogeneous group of high beta names whose 5 year CDS were spread between 85 and 95bps. Now, in Europe, the 5 year risk premium of a utility can only have one of two values: 60bps or 75bps. That means there is no longer any distinction between core and peripheral among the higher beta names. On the back of that, relative value trades are currently advertised to play a return to a more discriminating environment.