Why The High-Yield Market Won't See A Performance-Chasing Rally

Tyler Durden's picture

It seems that every commission-taking talking-head with a voice-box is espousing the 'truth' that equity portfolio managers will be forced to chase performance into year-end for fear of career-risk (we presume) - which of course would mean they would intellectually shed their previous skeptical view of the world (as opposed to buying the crappiest of the crap) in order to merely catch-up. In high-yield markets, however, where performance has been outstanding, things are quite different.

As Barclays notes, performance among HY mutual funds is tightly clustered this year (especially relative to recent years) which suggests: i) there are few who 'need' to chase high-beta to outperform/catch-up; and ii) these managers will be increasingly nervous as it would appear everyone has done the same thing (forced into it by heavy flows and the need to put money to work).

This leaves a HY credit market that is tightly call-constrained on capital appreciation (thanks to Bernanke's ZIRP), starting to see inflows fade post-QEternity (and shares outstanding drop in the ETFs), with managers anxious about their relative performance in a tightly correlated and crowded world of illiquidity away from ETFs.

As is clear by recent performance, high-yield market participants are less sanguine on the future than their equity counterparts - just as they were in April.

 

The concentration of YTD performance for HY mutual funds is indeed very tight (especially given the high absolute performance)...

 

and thanks to ZIRP, HY bonds are increasingly penalized by call-constraints (which the chart below shows as yield 'cost' from a yield-to-maturity adjusted back to yield-to-call (or worst))... as 40-70% of HY bonds (based on quality cohorts) trades to their next call date.

 

This means that expectations of further spread/yield compression (and price appreciation) is increasingly removed from HY bonds...

which perhaps explains why inflows have faded and ETFs have seen shares outstanding drop...

 

and HYG has been underperforming Stocks since QEternity...

 

 

Charts: Barclays and Bloomberg