Bottom line, our conversations with investors suggest yields in the 20 – 25% context could be attractive enough to draw in marginal capital – although several investors noted that is reasonable for triple C risk excluding commodities. In short, we're not there yet.
"Assuming selling in accordance to the average allocation of FX Reserve Managers and SWF across asset classes, we estimate that the sales of bonds by oil producing countries will increase from -$45bn in 2015 to -$110bn in 2016 and that the sales of public equities will increase from -$10bn in 2015 to -$75bn in 2016."
As we start the new year, there is a debate raging within the market. No the debate isn’t whether there is weakness in the manufacturing economy, that is taken as a given, especially after Friday’s awful Chicago Purchasing Manager number of 42.9. Instead, the debate boils down to this: 'bears' believe the manufacturing economy and the service economy act in conjunction with each other – that one cannot turn, without the other; 'bulls' view each segment of the economy as relatively independent and they highlight the size of the service economy relative to the manufacturing.The answer lies in the missing cog - the 'wealth' economy.
There has been a "continued shunning of fixed income" with over $25 Bn of outflows from bond funds in three weeks, of which $6.4 Bn took place in the past week, resulting in outflows in 6 of past 7 weeks.However, the biggest outflow risk is not to Junk but to investment grade, that main funding source for trillions in corporate stock buybacks: it was the IG space that took another beating with largest outflows ($3.5bn) in 17 weeks!
And so Wall Street has set its sights on the next junk bond fund casualty, a name which is well-known to most equity market participants: none other than Waddell and Reed (WDR), the fund which rose to infamy in the aftermath of the May 2010 Flash Crash, after it was initially blamed by the SEC as the culprit behind the Dow's 1000 point crash...
As new investor liquidity evaporates and as billions are redeemed first from the junk bond universe, then investment grade and then loans, the debt crisis which was unleashed in anticipation of the Fed's rate hike, is about to get much worse, and lead to even more prominent hedge fund "gates" and liquidations.
Last week we asked (rhetorically) if "something just blew up in junk?" We have the answer today, as triple-hooks (CCC-rated debt) in the junk bond market have crashed through the worst levels of 2011 and are now at the highest yields since July 2009. Amid this complacency still reigns in the equity market (just as it did when the last credit cycle turned).
"Like most turns in the credit cycle, it is uncertain exactly when the bottom will fall out of corporate credit markets, but the catalyst is likely to be an unexpected major event, perhaps even a single company getting into trouble. While we have been bearish on high yield for over a year now, we didn't think the conditions were yet ripe for a collapse. Now they're ripe."
Overnight, Credit Suisse became the latest bank to join Goldman, JPM and increasingly more banks in predicting that 2016 will be a year in which investors will want to rotate out of equities. Specifically, the second largest Swiss bank said that it is "we reduce our equity weightings to our most cautious strategic stance since 2008 and take our mid-2016 S&P 500 target down to 2,150, the same as our end-2016 target." Here are the five reasons why CS just looked at the mounting wall of worry... and began to worry.