Barcap highlights short duration plays

In its latest US Credit Alpha research report, Barclays Capital argues that there remain compelling opportunities in short duration credit products. This paper may lag the performance of longer dated debt in a steady or improving market, but it is less volatile than the market as a whole, has less sensitivity to treasuries and looks attractive on a spread basis, especially for spread-sensitive investors such as investment grade or core plus funds.

In investment grade, the report recommends the 2012 5.35% bonds issued by Macy’s. The retailer’s short-dated bonds yield between 4% and 5.5%, which is some 150-200 basis points wider than the average triple B industrial. The name is exposed to weakness in the consumer market, but has ample liquidity, such as a $2 billion undrawn revolver. Another investment grade name providing a similar yield is Bombardier, whose 6.75% notes mature in 2012.

Among European names, Barclays recommends the 6.125% 2012 bonds of UK retailer Dixons. Trading at 95.5, or a 7.8% yield, these bonds may be a good pull-to-par bet. They are the company’s longest dated outstanding debt instrument and so could enjoy a big bounce if Dixons is able to term out its debt.