Did The “Big Short” Retail CMBX Trade Pay Off In 2017?

Since the start of 2017, a number of opportunistic investors sought to profit from the expected demise of the physical retail sector, a trade which we and others dubbed the next ‘Big Short” – also known as the “Amazon crushes everyone” trade – and in which investors bought credit-default swaps against subordinate bonds in certain CMBX derivative indices that are tied to CMBS deals with healthy concentrations of loans against shopping malls and retail centers.
As CMBS advisory Trepp notes, the trade gained notoriety last February, when spreads for the BBB- and BB rated components of the indices went through a massive widening. They continued to widen at a somewhat steady clip until only recently. That alone indicates the trade, particularly if executed early, has paid off nicely.
CMBX consists of a group of indices that are each linked to a group of 25 CMBS conduit deals issued during a particular year. The indices are used as an indicator of the overall performance of the CRE market and enables investors to make bets on corresponding long and short positions.
Investors who expect deals in a specific index to incur losses can buy protection: they would pay a fixed-rate premium to a seller of protection who would bet against losses. If losses occur, the seller of protection would cover them. So, a short trade becomes most profitable when deals in an index suffer actual losses. It also becomes profitable in the event spreads widen, as they have.
Spreads Move Wider and Wider

This post was published at Zero Hedge on Fri, 12/29/2017 –.

 

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