10 year Volkswagen (VW) Euro bond yield soared by more than 100bps during just 2 days, whilst German Bund yield with almost same maturity remained low seen in below graph.
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| Orange Line : VW 2024 Yield / White : German Bund 2024 Yield |
Soaring VW bond yield is leading whole corporate bonds yields to be higher as well.
It effects especially into automobile industries abroad.
In below graph, we could find current soaring VW yield caused Euro industrial sector bonds spread widening. It is in line with the movement in equity markets yesterday, creating other auto companies' equity prices to tumble.
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| Orange : VW 2024 Yield / White : Barcap EuroAgg Industrial OAS |
In fact, I have no idea about whether this picture would go on further or not. This picture means the whole credit bonds, especially automobile corporate bonds prices could be deteriorated due to the side effects or spill over effects from worsening Volkswagen bonds prices. Someone argues this picture would be an opportunity to increase the position on the opposite side because current issue would be with Volkswagen only, not widespread.
But I plan to decrease the automobile sector position as considered worse scenario because I think the expected value is tilted toward negative side. In a credit bond market, we have to move earlier. If we approach to buy one, the gain would be small, but the loss would be massive.
So, I will sell some bonds in automobile sector and buy UST today. The position would be changed from slightly OW in automobile sector now, selling U.S. corps due to not having VW or other Euro automobile companies bonds, to slightly UW.
Besides, I plan to buy longer duration treasury bond against automobile sector bond. Selling 2.5 yr Ford bond and buying 7 yr UST, exactly, to cover short duration position very slightly. My conviction that the long-end yield should be pushed higher at the end of this year is weakened... while my position remains short now...
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