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

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slaughterer's picture

I thought after AAPL re-tested its 50DMA  HYG would be killing it again.  /sarc 

Dr. Engali's picture

Looks like it's time to issue some negative yielding treasuries. Ben needs to push retail further out on that risk curve.

malikai's picture

I think this calls for more serious measures.

Holding more than $100 in your bank account should be illegal for everyone except Apple.

fonzannoon's picture

Anyone who owns equities would be crazy not to ring the register with everything going on here. Anyone stupid enough to chase deserves to get this dumped on their heads.

Would love to see apple below 650

fonzannoon's picture

Bill Gross on right now warning about the debt and advocating treasuries. This is why he is a big giant bitch.

Hedgetard55's picture

The new currency scheduled to replace the dollar should be called the Bernanke, or the "Ben" for short. "AAPL trading at 15,000 Bens, way undervalued... says Lazlo Birinyi".


Bernanke claiming he is not "monetizing the debt" because rather than buy directly from Timmay HE IS BUYING FROM PDs AND PAYING A VIG TO THEM BORDERS ON SHEER LUNACY, OR CHUTZPAH AS NEVER SEEN BEFORE. MAYBE HE THINKS HE HAS A CHOOMBOI PARDON IN THE BAG WHEN shtf?

drivenZ's picture

and next on the yield chasing machine, European & Emerging HY and once people get so desperate, they'll start buying European Sov's again and the world will be fixed. 

IMA5U's picture

The high yield market also wont fall apart


HYG is range bound until at least after the election