With tight spreads and some low probability, high impact risks in the coming months, now is the wrong time to go long on European credit, according to research from Citigroup Inc (NYSE:C) Research’s Matt King. Like a row of dominoes, King says there is no reason for a chain of events to cause euro credit to take a dive, but he cautions that investors seem unaware of how precarious their position may currently be.


“Ironically, our best guess has been and remains that the domino run will not quite get started in the first place—or, at a minimum, that some benign and omnipotent central banker will reach in to remove a domino or two and stop any run before it reaches us,” says King.

Tapering will be done in an orderly manner: Citigroup

Citigroup Inc (NYSE:C)’s research predicts that tapering will be done in an orderly manner, avoiding any sudden shocks, that the sell-off of emerging market securities will last until the middle of next year and won’t be as harsh as some people suspect, and that credit spreads should remain tight. Other potential risks in the near future seem innocuous: the upcoming German elections are unlikely to blindside markets with a serious change of course; increasing supply is anticipated and accounted for; core Eurozone countries aren’t actively deleveraging.

“The longs we first established in early July and have been gradually reducing over the past three weeks, have basically run their course. The problem has less to do with any specific catalyst and more with the lack of a value proposition,” says King. He recommends holding on to high beta assets in the meantime until a better opportunity shows up.

There isn’t enough compensation for investing in most of the periphery: Citigroup

With so many risks that probably won’t create a problem, King figures that there isn’t enough compensation for investing in most of the periphery. It’s safe as long as nothing goes wrong, “but that’s a bit like leaving the room and hoping that when you come back later you’ll still find all the dominoes standing just as you left them,” he says. “As those with younger brothers will know, you ought to be okay – but at this point we just don’t think you’re being paid for it.”