High Yield Credit Market Flashing Red As Outflows Surge

Tyler Durden's picture


As we have been highlighting for a few weeks, something is rotten in high-yield credit markets. This week, the mainstream media is starting to catch on as major divergences in performance (high-yield bond spreads are 30-40bps off their cycle tights from just prior to MH17 even as stocks rally to new record highs) and technicals weaken. However, as BofA warns, flows follow returns and this week saw the biggest outflows from high-yield funds in more than a year. Investment grade bonds saw notable inflows as investors chose up-in-quality, rather than reach-for-yield, for the first time in years: equity investors, pay attention.


High yield credit markets have been overvalued for a record period of time...


On Tuesday, analysts at Ned Davis Research recommended that investors begin to sell high-yield bonds, partly because they look pricey and partly because performance has been flagging. "Investors are no longer being compensated for the additional risk in high-yield bonds," they wrote.

High yield credit markets are majorly diverging from stocks...

"Geopolitical risk is causing a pause," said Frank Ossino, senior portfolio manager at Newfleet Asset Management in Hartford, Conn., which oversees $12.9 billion. Investors tend to flee riskier assets during times of turmoil.

High yield credit markets are suffering major outflows...


Outflows from high yield funds and ETFs accelerated last week to $2.46bn following a sizable $1.85bn outflow in the prior week. Both of these outflows are the largest since the “taper tantrum”episode in the summer of last year.

"We're not seeing massive outflows yet, but at some point that's going to change," warned Phil Blancato, chief executive at Ladenburg Thalmann Asset Management, which oversees about $2 billion.

He said he is steering clear of high-yield exchange-traded funds in large part due to concerns about how they will fare in a downturn.

*  *  *

Between a sudden shift to a preference for "strong" balance sheet companies over "weak" balance sheet companies (the end of the dash for trash trade), and this rotation from high-yield to investment-grade, it is clear that investors are positioning defensively up-in-quality ending the constant reach-for-yield trade of the last 5 years.

Why should 'equity' investors care? The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering - for even the worst of the worst credit -  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

Simply put - equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... but it only ends with equity and credit weakening together. That is the credit cycle... it cycles.

Jeff Gundlach was right.

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Fri, 07/25/2014 - 14:22 | 5004429 ekm1
ekm1's picture


Then, where is the money going to?

Fri, 07/25/2014 - 14:39 | 5004529 disabledvet
disabledvet's picture


Sales growth compounding at twenty percent a quarter.

I wouldn't overstate this play given the collapse of the yen last year and now the euro starting to wobble big time.

The Netherlands could absolutely pull out of the EZ and that would probably be it for the euro. That would force German, Austrian and who knows who else to start forward deploying to their Eastern frontiers.

Iron Dome looks over sold at the moment but it still has shown efficacy.

Fri, 07/25/2014 - 15:01 | 5004645 El Oregonian
El Oregonian's picture

If you don't hold physical assets then you only hold hope... And that is drying up like a shrinking mirage... Poof*... aannddd, it's gone...

Fri, 07/25/2014 - 15:37 | 5004836 CClarity
CClarity's picture

US Treasury mkt signalling a not so healthy macroscape today.   Watch out at the edges.

Fri, 07/25/2014 - 15:29 | 5004788 syntaxterror
syntaxterror's picture

Quick SAT question...

If Bob sells merchandise for $10 and loses $1 on every sale, will he go bankrupt if he increases sales by 20% every 3 months?

A. Yes

B. No

Fri, 07/25/2014 - 15:36 | 5004827 babylon15
babylon15's picture

C. Not enough info, depends on size of bailout

D.  All of the above

Fri, 07/25/2014 - 15:37 | 5004830 Seer
Seer's picture

Duh, I think that it's pretty clear that losses can always be made up in "volume!"

Fri, 07/25/2014 - 15:48 | 5004907 g speed
g speed's picture

NO--his fortune will soar---- increase in sales signals growth and algos will bid growth which will increase capital by leaps and bounds--Bob will be a zillionare and be on the cover of--(you name it) financial rag at which time he will be able to borrow a zillion at ZIRP from the show and buy back all stawks outstanding which will make his business a target for M&A. He will be bought out for 3K % times earnings by Goldem who will dump the stawk to their loyal retail---its a win win --  

Fri, 07/25/2014 - 14:51 | 5004574 TeethVillage88s
TeethVillage88s's picture

War Bonds (joking)

US Treasuries = War Bonds. Remember the Belgian Bulge.

Correct me if I'm wrong here. Back in 2008 I saw price declines in Mutual Funds, then I looked at declines in other parts of the equity markets, maybe commodities all went down, and I pulled back my investments just before the Stock Market Crashed.

So I have to ask. If the Economy is going to collapse or the Currency Collapse... wouldn't it be proceeded by a Stock Market Crash.

Like Big Institutional Investors pulling money out of Bonds or Stocks.?


Fri, 07/25/2014 - 14:53 | 5004601 ekm1
ekm1's picture

No, it doesn't work like that.


Fed creates excess reserves ----------market go up


Fed extinguishes reserves----------markets go down


Fed refuses to bail out hyper leveraged entities like Lehman etc -----------implosion.


It's all MANUALLY done.

Fed makes and Fed breaks, by order of the Congress of the United States of America

Fri, 07/25/2014 - 15:42 | 5004861 Seer
Seer's picture

Yes, the only thing that truly can be affected is the SPEED of the merry-go-round.

To pay tribute to knukles' posting about a "drowned pony" (which was what brought me to this article):

What goes up must come down
spinning wheel got to go round
Talking about your troubles it's a crying sin
Ride a painted pony
Let the spinning wheel spin

You got no money, and you, you got no home
Spinning wheel, spinning all alone
Talking about your troubles and you, you never learn
Ride a painted pony
let the spinning wheel turn

Did you find a directing sign
on the straight and narrow highway?
Would you mind a reflecting sign
Just let it shine within your mind
And show you the colours that are real

Someone is waiting just for you
spinning wheel is spinning true
Drop all your troubles, by the river side
Catch a painted pony
On the spinning wheel ride

Someone is waiting just for you
spinning wheel is spinning true
Drop all your troubles, by the river side
Ride a painted pony
Let the spinning wheel fly

- Blood Sweat and Tears

Fri, 07/25/2014 - 17:15 | 5005328 TeethVillage88s
TeethVillage88s's picture

Thanks, but I looked at Fed Reserves chart in FRED a few month back and it seems there was no big reserves till 2008. Unless the data is wrong it was a flat line until 2008.

So you maybe be talking about something else.

I probably get it that Bear Sterns & Lehman could have been picked to fail by the Fed, a Cartel, or US Congress. But frankly congress does it's best to hide it's intelligence.

2014-07-23: 2,792.302 Billions of Dollars

2014-06: 81,443 Millions of Dollars

All Federal Reserve Banks - Total Assets, Eliminations from Consolidation
2014-07-23: 4,410,746 Millions of Dollars


Fri, 07/25/2014 - 17:25 | 5005364 ekm1
ekm1's picture

Fed data is fake

Fri, 07/25/2014 - 14:26 | 5004441 slaughterer
slaughterer's picture

A lot of flow out of HY is going into European exchanges floating new bond ETFs or EM bond funds.  Lets see how that works out.

Fri, 07/25/2014 - 15:25 | 5004775 knukles
knukles's picture

Heavens!  EM bonds are nothing but High Yield with Country Specific and Currency Risks thrown on Top!

Ah, I'd like my melted ice cream with spoiled whipped cream and a rotten cherry, pleas.  No nuts.  Hold my nuts.

Fri, 07/25/2014 - 15:58 | 5004959 Seer
Seer's picture

Ha!   Not falling for That trick!

Fri, 07/25/2014 - 14:25 | 5004446 q99x2
q99x2's picture

At least every time there have been outflows for two consecutive weeks massive inflows followed.

Fri, 07/25/2014 - 16:06 | 5004996 Seer
Seer's picture

Years ago (here on ZH) I'd stated that it would come down to fewer and fewer bigger and bigger containers sloshing money between themselves and that eventually the sheer volume of the sloshing would result in capsize.

Fri, 07/25/2014 - 14:26 | 5004449 Al Huxley
Al Huxley's picture

I used to watch these kind of things, buy my new advisor - Yellen Capital LLC - recommends focusing on Price to Equity, and apparently that ratio's looking well within normal bounds right now.

Fri, 07/25/2014 - 14:29 | 5004461 Clint Liquor
Clint Liquor's picture

I wouldn't let Yellen manage my kid's piggy bank.

Fri, 07/25/2014 - 14:38 | 5004509 El Vaquero
El Vaquero's picture

You could make a hollow porceline Yellen figure with a coin slit on the top.  She looks kind of like a piggy and if $0.25 goes in, it adds $10 to the ledger to make your kid feel richer.

Fri, 07/25/2014 - 16:01 | 5004982 Seer
Seer's picture

Just don't let the kid do a pinata on it, else he/she will find that it's empty!

It's the NEW circus!  Step right up to see the bearded lady (following in the shadows of the Great Beard), put your money down...

Fri, 07/25/2014 - 16:20 | 5005066 NoDebt
NoDebt's picture

Bought my son a piggy bank a few years ago.  Every time you dropped a coin in it, it would be that cash register sound- "Cha Ching!".  It was made in China.  After a few weeks the battery wore down and the sound got lower and slower each time.  It sounded a little like a gun being racked and fired.  Then, as time went on it sounded more like a dying animal.  A a dying cow, maybe.

I found it to be instructive.  My son found it to be alternately scary and hysterical.

Fri, 07/25/2014 - 14:41 | 5004541 gdiamond22
gdiamond22's picture

Technically, she IS managing your kid's piggy bank. The porcleian stuff is worth more than the stuff inside.

Fri, 07/25/2014 - 14:44 | 5004550 Hippocratic Oaf
Hippocratic Oaf's picture

Meh, the outflows are just noise and the spread in junk appears to be in normal range.

I wouldn't even begin to show concern until PE ratios hit 40 on average - Yellen

Fri, 07/25/2014 - 17:14 | 5005325 Rubbish
Rubbish's picture

My grandsons piggy bank is a small wooden treasure chest with only Silver Eagles, fuck yellon at me. Mine contains Gold at the bottom of the ocean near the Malaysian plane.


Bitchez and Pirates

Fri, 07/25/2014 - 15:59 | 5004964 Seer
Seer's picture

So, the takeaway is to have PE in one's pants?

Sat, 07/26/2014 - 12:41 | 5007290 IANAE
IANAE's picture

...the lender of last resort can't be limited liability i.e. LLC.

Yellen Capital Management (YCM) perhaps?


Fri, 07/25/2014 - 14:28 | 5004455 HUGE_Gamma
HUGE_Gamma's picture

how accurate are fund flow figures ?

Fri, 07/25/2014 - 14:29 | 5004473 monopoly
monopoly's picture

Well, it is a wide set of doors. We will all be able to get out at the same time, right........Oh, never thought of that.

Fri, 07/25/2014 - 14:46 | 5004571 NOTaREALmerican
NOTaREALmerican's picture

(Scanning horizon for the Hindenburg Omen...)

Fri, 07/25/2014 - 14:50 | 5004580 buzzsaw99
buzzsaw99's picture

I understand the momo mentality and the "there is no default risk in this market" mentality but holy cow a good chunk of HY ETF holdings are rated "below B" which means utter crap, and long dated utter crap at that. Why would anyone pay UP for that? Talking about picking up pennies in front of a steam roller.

Fri, 07/25/2014 - 14:53 | 5004606 fonzannoon
fonzannoon's picture

B is investment grade now. I paid 106 for a bond rated CCC-  a few months ago. getting a 9% coupon and the price of the bond has gone up.

what could go wrong?

Fri, 07/25/2014 - 14:55 | 5004611 buzzsaw99
buzzsaw99's picture

nice! ;)

Fri, 07/25/2014 - 15:07 | 5004687 Unknown Poster
Unknown Poster's picture

If one goes down the ladder in equity quality, the picture looks different. HYG is outperforming the Russel 2000. IWM:HYG,SPY:HYG: CandleGlance - StockCharts.com - Free Charts

Fri, 07/25/2014 - 15:37 | 5004834 buzzsaw99
buzzsaw99's picture

i feel like i understand that dynamic well enough. junk bonds finance levered stock buybacks, momo traders jump in and squeeze the short sellers, driving up the price, which can go to infinity. the problem with hy debt is that it just can't go very much higher before it hits zirp, which ain't gonna happen. return free risk is all they are buying.

Fri, 07/25/2014 - 16:34 | 5005157 Racer
Racer's picture

Anyone who is using other people's money and getting paid a lot to do it

Fri, 07/25/2014 - 14:50 | 5004589 ChartreuseDog
ChartreuseDog's picture

Hey, look Honey - all the water is draining away from the beach and back out into the ocean. I wonder what it means?

Fri, 07/25/2014 - 14:58 | 5004633 Dr. Richard Head
Dr. Richard Head's picture

Ohhhhh...how nice!!! Let's go find some sea shells out there.  Chances are the beachcombers haven't been able to get to those.  Come  on, hurry up and bring a bucket. 

Fri, 07/25/2014 - 15:27 | 5004783 knukles
knukles's picture

Look, a drowned pony!  I want the shiny horn on it's head, daddy!

Fri, 07/25/2014 - 15:54 | 5004944 headhunt
headhunt's picture


Fri, 07/25/2014 - 16:10 | 5005012 Racer
Racer's picture


"Lawsuit Stunner: Half of Futures Trades in Chicago Are Illegal Wash Trades"

Truly shocking but unsurprising to find criminals in charge of Fraud Street

Fri, 07/25/2014 - 16:32 | 5005149 assistedliving
assistedliving's picture

what?  me worry?

Fri, 07/25/2014 - 17:12 | 5005318 PTR
PTR's picture

I shit you not- as I refreshed the home page on clicked on this article, Kansas "Dust in the Wind" was playing.  


How fitting.

Fri, 07/25/2014 - 23:52 | 5006399 hedgiex
hedgiex's picture

Don't look at the inflow/outflow. Just look at how many leveraged  institutional lemmings (mutual funds etc) are still in these HY & EM Bonds. My guess is no much exits from these groups that do not manage the smart money. Also, you have to watch the "shorts" from one particular group (hedge funds). My guess is that they are paranoid over liquidity and will not add on to this pile of junks. There is still gas in these junks although still waiting for catalysts like one blow-up anywhere with one of these institutionalise funds or a default from an unexpected country (A EC periperal country will do the job as they are not in the radar of  EM bond (an oxymoron itself)).

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