Simon’s view on the correlation breakdown of oil prices & U.S. high yield energy spreads YTD.
Simon: Financial markets have rallied very strongly since the start of the year which begs the question – is there any value left in markets – particularly in credit. I received an interesting chart from a broker, which shows the correlation over the last 12 months between oil price and high yield energy spreads. Now it’s quite clear that for some time up until the middle of February, there was a very close correlation – as the oil price went up, spreads narrowed. And yet since the middle of February that correlation has quite clearly broken down as the oil price has continued to trend up. Now, our assumption is that that gap will close over time and that if the oil price remains where it is today, or maybe even rises, it’s likely that the gap will close as high yield energy spreads narrow. So we’re screening across the global energy high yield universe to try and find those names with improving credit fundamentals which we think are most likely to rally as other investors spot the same opportunity and demand for those securities increases.