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High-Yield Credit Crashes To 6-Month Lows As Outflows Continue

Tyler Durden's picture




 

We have been warning for a while that not only is the high-yield credit market sending a warning but that it is critical for equity investors to comprehend why this is such bad news. This week has seen exuberant equity markets start to catch down to high-yield's warning but today's surge in HY credit spreads to six month wides is a rude awakening. Between outflows, a huge wall of maturities (and no Fed liquidity), and corporate leverage, the reach-for-yield just became an up-in-quality scramble. HY spreads are over 70bps wider than cycle tights implying the S&P 500 should be around 1775. When the easy-money-funded buyback party ends, will you still be dancing?

 

High-yield protection is in huge demand - credit spreads surge to 6-month wides - implying a 1775 S&P 500.

 

As outflows continue to rise...

Outflows from high yield funds and ETFs amounted to $1.69bn this week following a notable outflow of $2.46bn last week and a $1.85bn outflow in the week prior to that. The last three weeks account for the largest outflows in HY this year. The outflows are likely a result of the selloff in high yield bonds in July, as flows typically follow return.

 

You were warned:

High-Yield Bonds "Extremely Overvalued" For Longest Period Ever

 

High Yield Credit Market Flashing Red As Outflows Surge

 

Is This The Chart That Has High-Yield Investors Running For The Hills?

*  *  *

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.

 

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Fri, 08/01/2014 - 12:08 | 5033030 MH17FLIGHT
MH17FLIGHT's picture

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... http://goo.gl/bhiamE

Fri, 08/01/2014 - 12:16 | 5033054 Quus Ant
Quus Ant's picture

Tell me more about your sister.

 

and remember-  I'm an assman.

Fri, 08/01/2014 - 12:31 | 5033228 max2205
max2205's picture

Fuck me....all this horrible news and the spx is down?

WTF over

Fri, 08/01/2014 - 12:14 | 5033075 Bossman1967
Bossman1967's picture

Scam alert yall

Fri, 08/01/2014 - 12:16 | 5033104 rum_runner
rum_runner's picture

Tyler, it's the same text content every time.  Can't we filter these pathetic fuckers?

Fri, 08/01/2014 - 12:25 | 5033182 ceilidh_trail
ceilidh_trail's picture

Probably one guy changing names. He's gonna run out of money soon with what he's having to pay his sisters friend.

Fri, 08/01/2014 - 12:40 | 5033305 StarfishPrime
StarfishPrime's picture

At least he picked a relevant username this time...

Fri, 08/01/2014 - 12:22 | 5033155 Yen Cross
Yen Cross's picture

  Averaging 15k what? Since you didn't include a ($) sign, I'll take that figure as 15k blowjobs.

Fri, 08/01/2014 - 13:15 | 5033496 Landrew
Landrew's picture

I have dated her a few times, take my word for it, not worth the time.

Fri, 08/01/2014 - 12:13 | 5033068 Bossman1967
Bossman1967's picture

Ill be dancing all night long. No money in these fools market.I am playing it safe in gold and silver and cash and when the piper plays his final toon Ill be ok. I learned in 2008 that gambling is for gamblers and you cant win when the dealers are all cheating.

Fri, 08/01/2014 - 12:32 | 5033242 101 years and c...
101 years and counting's picture

if tyler pulled up that chart over the last 3 years, it would imply 1400 for spx.

Fri, 08/01/2014 - 12:17 | 5033079 LetThemEatRand
LetThemEatRand's picture

Had drinks with a mid-50's guy yesterday afternoon (it was a Thursday, so it's cool), and he basically said he's dumping stocks if they drop 1% from here.  I'm guessing he has a few hundred thousand in various funds.  Purely anecdotal, but I'll bet there are a lot of guys out there like him who stayed long over the last few years, but who plan to dump at the first sign of trouble to protect their retirement principal.   I suspect the Fed is aware of this and will do everything possible to prop it up (unless they've decided the time is right for a blood bath).

Fri, 08/01/2014 - 12:24 | 5033163 Quus Ant
Quus Ant's picture

Eventually the buildings will have to come down, LTER.  And imagine the complicated demo with all that asbestos.  Wouldn't it make more sense to bring them down in a controlled way on our timetable?  Heck, we might even get insurance to pick up the tab.

Fri, 08/01/2014 - 12:14 | 5033080 Unknown Poster
Unknown Poster's picture

The lack of easy money is spanking some assets.

Fri, 08/01/2014 - 12:18 | 5033117 KnuckleDragger-X
KnuckleDragger-X's picture

The great muppet massacre-coming soon.

Fri, 08/01/2014 - 12:19 | 5033122 buzzsaw99
buzzsaw99's picture

nobody pays attention to the "check engine" light these days

Fri, 08/01/2014 - 12:25 | 5033183 Yen Cross
Yen Cross's picture

  Who needs to pay attention, when you've got NINJA car loans for anything with a pulse...

Fri, 08/01/2014 - 12:19 | 5033131 Elliptico
Elliptico's picture

CAPM says a rise in the risk free rate causes all asset classes to lose value. It may be that an expectation of rising rates is causing the drop. Could also be the release of those Yellen upskirt photos.

Fri, 08/01/2014 - 12:22 | 5033147 buzzsaw99
buzzsaw99's picture

-1 last sentence totally uncalled for

Fri, 08/01/2014 - 14:48 | 5034073 Mi Naem
Mi Naem's picture

Wow!  buzzsaw was actually offended by something crude and disrespectful. 

Haven't seen that before.  Did your wife assume your ID for the day? 

Fri, 08/01/2014 - 12:20 | 5033143 Let The Wurlitz...
Let The Wurlitzer Play's picture

I have a bunch of "cov-lite" notes.  Does anybody want to buy them??  I'l give ya a good deal!

 

 

Fri, 08/01/2014 - 13:06 | 5033460 froze25
froze25's picture

So is the deflation coming?  Do I need to buy storable food?

Fri, 08/01/2014 - 16:58 | 5034853 bentaxle
bentaxle's picture

NO. You need to have a boating accident first, then follow the blueprint from there....and get a spear gun.

 

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