Unlike other products now on the U.S. market, a new family of
from ProShares that is focused on credit default swaps (CDSs) will
allow U.S. investors a 'pure play' to weigh in on credit quality
for the first time.
Bond issuers, especially low-credit issuers, have benefited
immensely from the Federal Reserve's low-rate policy as
yield-starved investors have crept down the credit spectrum in
search of real return. It's not just U.S. companies that have
loaded up on debt either, "global bond issuance is up a stunning 53
percent from the same period in 2012," according to CNBC.
But after a long sustained upward move in bond prices, some are
nervous this beast might turn around to bite them. ProShares'
filing seems to capitalize on investor anxiety and be an attempt to
The documents filed with the SEC outline plans for eight CDS
ETFs that offer long or short positions on the credit of either
investment-grade or high-yield issuers in Europe and North America.
They're unique because, if brought to market, they would offer the
most direct way to play credit risk.
The eight ETFs referenced in the filing are as follows:
- ProShares CDS Long North American HY Credit ETF
- ProShares CDS Short North American HY Credit ETF
- ProShares CDS Long North American IG Credit ETF
- ProShares CDS Short North American IG Credit ETF
- ProShares CDS Long European HY Credit ETF
- ProShares CDS Short European HY Credit ETF
- ProShares CDS Long European IG Credit ETF
- ProShares CDS Short European IG Credit ETF
The filing is timely too:Bond prices appear at the ready to
crash downward if Ben Bernanke simply utters "taper" one more
Since the crash of 2008, well-rated and poorly rated companies
alike have exploited the opportunity to borrow money at ultra-low
rates, but one has to wonder if a day of reckoning is coming.
After all, many of these companies are borrowing at near-record
low spreads over risk-free Treasury securities-a trend that is
bound to reverse.
One glance at a chart of how the cost of borrowing has dropped
drastically over the past three years makes it obvious why so many
companies, especially the less creditworthy, have loaded up on
cheap debt. Check out the effective yield on high-yield (junk)
bonds, which we can use a proxy for borrowing cost:
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