With stocks at record highs, ongoing commentary that retail is back and will lift all boats to infinity and beyond, it seems the professionals in the credit market are not amused. We have noted the ongoing divergence between the asset-classes for two weeks now but with today's ultra-low volume drift higher in stocks, the drop in high-yield bonds is even more notable. The question we have is - as we have explained in great detail before
- if rates for leveraged firms is rising, how will management maintain their exuberant re-leveraging to buoy their stock prices
in the face of crushing top-line deflation?
Credit is now at 4-week lows (high yields and spreads) as stocks push on - these 'decouplings' never last
Remember corporate credit risk reflects just as much on the underlying business volatility and cashflow outlook as the equity part of the capital structure. There are periods in the credit cycle when credit will underperform as management relevers (i.e. buybacks/dividends) but that always only lasts a brief time
as credit begins to penalize those actions, making the re-levering non-economic, and an over-expectant equity market reverts back to a less-levered reality.
As we noted before,
The bottom-line is that the credit-cycle cannot be hidden forever - unless we can rest assured that even if the Fed does 'Taper' it will rapidly 'un-Taper' soon after as the gross misallocations of capital (rise in liabilities - which will not drop - against an artificial rise in assets - which will fall)