Opportunities from the Credit Crisis?

A presentation entitled: “The Credit/Liquidity Crisis of 2007: Opportunities for US Bond Investors” sounds as though it would leave you with grounds for optimism. Not quite.

Instead, Michael Lustig, a managing director at BlackRock, made it clear that he is extremely pessimistic. The heading for one slide – “Things Are Terrible – And There’s No Sign of a Bottom” – adequately catches the spirit. .

Echoing the Fed’s Janet Yellen earlier in the day, he said he believes the outright falls in US house prices are significant, and make this crisis different from its predecessors. As he said, Americans’ percentage of equity in their homes has fallen below 50 per cent for the first time on record since 1945. This means there is a real danger of negative equity. This time, he fears, is different.

All this being said, he did as promised identify a number of opportunities. They are as follows:

- Cash corporate bonds are cheap compared to synthetic equivalents

- Investment-grade financials may be cheaper than high-yield bonds

- Credit card ABS spreads are at record wides, but biased towards more widening. There is fundamental value in the top-tier names.

- Agency fixed-rate mortgages are cheap, and offer fundamentally good value “even when taking into account the elevated level of volatility, prepayment risk, and negative convexity.”

- Non-agency MBS are historically cheap.