This Is The Longest Streak Of High-Yield Outflows On Record (And Why It May Get Worse)

Tyler Durden's picture




 

When we first brought the market's attention to high-yield credit's flashing red warning, it was shrugged off as unimportant by most - stocks are rallying so who cares (even though we explained in detail why equity investors should care). Now that the mainstream media has all become high-yield bond experts we thought it worth considering how much worse this could get. As Barclays notes, for those keeping track, retail funds have thus far seen 22 consecutive days of redemptions for a total of $16.9bn in assets - the longest streak in history and while the effect of retail selling on valuations has not been negligible, it has also not been proportionate to the magnitude of the outflows (yet).

 

 

In other words - the 2-3% drop in index prices is well short of the 6-7% drop one would expect from the outflows which suggests if selling pressure persists managers will be forced to sell their more illiquid bonds (having unwound the liquid winners) into a market that is as illiquid as it has ever been (for sellers).

 

*  *  *

As we noted previously, 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?

*  *  *

But something changed recently...

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.

Simply put, Jeff Gundlach was right.

*  *  *

Of course we have explained this won't end well...

US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.

 

Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.

 

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Sat, 08/09/2014 - 21:26 | 5071476 Greenskeeper_Carl
Greenskeeper_Carl's picture

Is there a bond out there that isnt overvalued? all of them are priced as they are based on highly manipulated interest rates. loaning money to bankrupt govts or companies for interest rates lower than real inflation isnt going to end well

Sat, 08/09/2014 - 21:28 | 5071486 zorba THE GREEK
zorba THE GREEK's picture

He who sells first sells best

Sat, 08/09/2014 - 22:07 | 5071605 Pladizow
Pladizow's picture

Yet the high yield short ETF's have not moved?

Sat, 08/09/2014 - 22:37 | 5071695 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The theater is burning and the few escaped. Good luck to rest of the investors!

Sun, 08/10/2014 - 03:19 | 5072098 Elvis the Pelvis
Elvis the Pelvis's picture

Everything is going to start getting worse now.  We reached Dow 17,000.  The markets have peaked.  Now comes the deflationary nightmare.  Bitchez.

Sat, 08/09/2014 - 22:58 | 5071745 ObamaDepression
ObamaDepression's picture

Very soon.

The Obama Depression is about to enter part 2.

Sun, 08/10/2014 - 02:46 | 5072062 Squid-puppets a...
Squid-puppets a-go-go's picture

why this news is important:

Its not so much about the end of kicking the can, its about a leg being broken: they are ceasing to have the ABILITY to kick the can

 

Sat, 08/09/2014 - 21:34 | 5071510 zorba THE GREEK
zorba THE GREEK's picture

This isn't going to end well

Sat, 08/09/2014 - 21:41 | 5071529 NYPoke
NYPoke's picture

It will, if you are short...the market that is.

Sat, 08/09/2014 - 23:01 | 5071751 ObamaDepression
ObamaDepression's picture

Its the timing that's a bitch.

Sat, 08/09/2014 - 23:25 | 5071816 NYPoke
NYPoke's picture

Yes, it is.  Would be nice to get a bigger down draft in August & hit the top in October.  It is what it is though.

Sat, 08/09/2014 - 23:07 | 5071768 ObamaDepression
ObamaDepression's picture

Its the timing that's a bitch.

Sun, 08/10/2014 - 01:10 | 5071962 good man
good man'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

Sun, 08/10/2014 - 02:47 | 5072064 Squid-puppets a...
Squid-puppets a-go-go's picture

Tyler? Just take him out, please

Sun, 08/10/2014 - 03:59 | 5072123 rogerramjet
rogerramjet's picture

get off this blog u ass...........

Sun, 08/10/2014 - 09:51 | 5072395 photonsoflight
photonsoflight's picture

How many tricks do you do and exactly whats involved? Whips, chains etc?

Sat, 08/09/2014 - 21:26 | 5071483 The Phallic Crusader
The Phallic Crusader's picture

arent the redemptions largly going into equities?

Be nice to see what's going on with HY mutual funds...  too lazy to try to look into it right now, obviously a lot of these bonds are in hy funds - are the funds swapping out for security?  I don't know.

 

All I know is buying long term debt is for 'tards.

Sat, 08/09/2014 - 21:30 | 5071489 ekm1
ekm1's picture

Cluelessness of Zerohedge continues unabated.

Zerohedge still assumes that there is an actual market and all is interconnected as if there were free market.

Zerohedge still believes in ......cycles.

 

Let me tell what is happening:

A human made system stays up and goes down by humans.

If central command called government decides that they do not like cycles, then cycles are simply banished and economy become centralised. No credit needed, just food stamps and gov subsidies.

 

We are there.

Which of course leads to break down of supply chains, which is under way.

Sat, 08/09/2014 - 21:33 | 5071501 The Phallic Crusader
The Phallic Crusader's picture

huh?

Sat, 08/09/2014 - 21:34 | 5071508 ekm1
ekm1's picture

Otherwise known as communism.

 

Sat, 08/09/2014 - 21:44 | 5071536 Greenskeeper_Carl
Greenskeeper_Carl's picture

not saying you are wrong, but pointing out that there are actual investors(people, not institutions) leaving these funds doesn't neccessarily mean any kind of cycle has to be involved. In fact, this type of article could prove you right. These types of outflows occuring while the bonds themselves still remain unrealistically priced could give yet another example of the fact that there is no 'market' anymore, and "someone" is propping them up

Sun, 08/10/2014 - 02:06 | 5072044 FreedomGuy
FreedomGuy's picture

I suggest there are no markets at all any more. There are only gambles. All are government manipulated frauds. If you can invest in between the government manipulations you win. I suspect if you use any traditional templates you will lose.

Sun, 08/10/2014 - 02:52 | 5072067 Squid-puppets a...
Squid-puppets a-go-go's picture

EKM1

as long as this govt that you falsely presume to be omnipotent uses the framework of ursury and fractional reserve banking, there will be cycles.

They can be distorted, skewed, delayed and exacerbated. But not eradicated. Not unless ursury and leverage are both outlawed. period.

Sun, 08/10/2014 - 07:28 | 5072232 espirit
espirit's picture

If anyone has been following ekm's posts, his analysis delves deeply into crisis at hand.

Critical thinking skills must be utilised to peel back the layers of subterfuge covering ongoing events.

Go For It EKM1 - Do Not Underestimate Your Enemy.

Sat, 08/09/2014 - 21:50 | 5071556 Keyser
Keyser's picture

And what is the definition of insanity?

Sun, 08/10/2014 - 09:57 | 5072402 photonsoflight
photonsoflight's picture

Electing bush and obama for a second term?

Sun, 08/10/2014 - 12:06 | 5072709 barre-de-rire
barre-de-rire's picture

he just read 1984

Sat, 08/09/2014 - 21:47 | 5071545 ekm1
ekm1's picture

THEOREM

 

If the financial system is allowed to go through a wipeout (and it will), then this will be a highly positive event for the real economy, employment and prosperity.

Sun, 08/10/2014 - 01:33 | 5072014 world_debt_slave
world_debt_slave's picture

mushroom clouds before TPTB allow that to happen.

Sun, 08/10/2014 - 09:59 | 5072408 photonsoflight
photonsoflight's picture

In which case construction , and the medical industry will boom even more. Go long on indoor hydroponic food also.

Sun, 08/10/2014 - 23:37 | 5074959 TheReplacement
TheReplacement's picture

Aw that's just great!  I love a happy ending.  In other news Kim's ass got even bigger.  Leading scientists are puzzled over how the rest of the matter in the universe is not being sucking by its gravitational mass.  Next up, we'll speak with Stephen Hawking, no pun intended, about the meaning of nothing and why he should just shut the hell up.  Okay, that pun was intended.  You got me.  And now the weather...

Que girl with immense boobs and tiny waist.  Yay weather.

Sun, 08/10/2014 - 00:32 | 5071912 F0ster
F0ster's picture

So you're saying it's different this time?

Sun, 08/10/2014 - 16:38 | 5073457 ekm1
ekm1's picture

Not all all.

In communism we banished cycles until we ran out of food

Sun, 08/10/2014 - 11:51 | 5072665 moneybots
moneybots's picture

"Zerohedge still believes in ......cycles."

Cycles are a mathematical fact.

 

"If central command called government decides that they do not like cycles, then cycles are simply banished and economy become centralised."

 

 Cycles cannot be banished, as the laws of math cannot be banished.

 

 

Sun, 08/10/2014 - 23:33 | 5074952 TheReplacement
TheReplacement's picture

So when all of this malinvestment leads to the break down of supply chains you are saying that is not the non-existent market reacting?  I'm confused.

Sat, 08/09/2014 - 21:30 | 5071492 NoDebt
NoDebt's picture

If somebody is selling, there has to be somebody on the other end buying.  Even ZH has had many articles about the fallacy of "money on the sidelines".  The only question is the price at which the transaction takes place.  Which hasn't moved much.  Which means they're just changing hands.  Tell me who's BUYING at these still-elevated prices and I'm all ears.

Sat, 08/09/2014 - 21:31 | 5071498 ekm1
ekm1's picture

Almost all ZH articles talk about outflow.

And .....where did the money go?

Sat, 08/09/2014 - 21:41 | 5071526 fonzannoon
fonzannoon's picture

http://finance.yahoo.com/q/bc?t=5y&s=HYG&l=on&z=l&q=l&c=spy&ql=1

 

I dunno....if you pull these charts back far enough it just seems like business as usual.

Sat, 08/09/2014 - 21:44 | 5071537 ekm1
ekm1's picture

Recycling, recycling, recycling to keep people busy, Fonz, as if there is something going on.

Until world actually drops USD entirely.

 

Watch out for executives lying dead on streets

Sat, 08/09/2014 - 21:51 | 5071560 ekm1
ekm1's picture

http://seekingalpha.com/article/2375215-the-fed-to-pay-foreign-banks-to-...

Recycling and recyling Fonz, until central command says no.

As an example, that will occur for sure when Saudis would refuse to ship oil unless QE is fully unwound and an wipeout is engineered

Sat, 08/09/2014 - 21:59 | 5071584 fonzannoon
fonzannoon's picture

well QE is just about unwound. Yields are dropping. Most big firms are skittish and have a decent amount allocated to cash and bonds. So yields are low. Stocks are taking a breather. Gas by me is down to $3.65.

Look if there really is some kind of back room war going on and the dollar loses then it's hyperinflation. If the dollar wins I think that means just more of the same. Other countries just continue to get crushed and suffocated due to lack of dollars.

Sat, 08/09/2014 - 22:02 | 5071592 ekm1
ekm1's picture

No. Officially QE is being reduced, not unwound.

Unwound would mean selling of Fed balance sheet.

 

And no, QE is not being reduced, it has been increased via other central banks by use of unlimited currency swaps that nooooobody is talking about.

http://www.federalreserve.gov/newsevents/press/monetary/20131031a.htm

 

Hence, Financial Aggression, hence wars expanding around the world.

 

QE = Financial Aggression on world real assets.

World is responding with showing middle finger to Obama who has ordered QE

Sat, 08/09/2014 - 22:12 | 5071620 fonzannoon
fonzannoon's picture

"The Canadian government confirmed on Thursday that it raised 1 billion Canadian dollars ($938.1 million) by reopening its December 2064 bond, in a move to lower borrowing costs.

Thursday's offering size was double the minimum amount targeted, a sign that demand was strong, as investors sought a haven against global market volatility amid growing concerns over the strength of the economic recovery in Europe."

The 50-year bond issue was priced better than expected to yield 2.76%. The bond carries a coupon interest rate of 2.75%."

Sure seems like same as it ever was man. Every countries borrowing costs dropping as their debt expands. Currencies all falling into lock step with each other...

Sat, 08/09/2014 - 22:19 | 5071637 ekm1
ekm1's picture

What is doesn't say is who bought those bonds, investoers or bank of canada?

 

Secondly, manipulating money supply has got nothing to do improving the economy.

That has got nothing to do with costs of funding the govewrnment.

 

Government is funded by the output of the people, not by money it can create on computers

If people refuse to create output just because gov guarantees everything, then there is no funding.

 

In communism we had infinite funding with paper. We just couldn't produce enough food for everybody

Sat, 08/09/2014 - 22:21 | 5071646 fonzannoon
fonzannoon's picture

when was any of this ever about improving the economy? This was never about improving the economy. The economy can not be improved. Between globalization and automation and crony capitalism etc etc...the economy is still right on it's natural path towards being obliterated. The only question is can we have a 1% world with the next 7-8% below them doing pretty well licking their heels and then a gigantic free shit army, or do we need ebola to take down 60% of the population. 

Sat, 08/09/2014 - 22:24 | 5071659 ekm1
ekm1's picture

:-)

Sat, 08/09/2014 - 23:10 | 5071777 Greenskeeper_Carl
Greenskeeper_Carl's picture

i like both of yall, and im glad ekm is back(read comments a long time before i started posting, so i remember you from a while back), but don't you guys know each other, as in not just on here, so these posts with yall agreeing with each other are kinda pointless, since you could just have this conversation in person?

Sat, 08/09/2014 - 23:13 | 5071783 ekm1
ekm1's picture

No, we don't.

 

Sat, 08/09/2014 - 23:14 | 5071787 fonzannoon
fonzannoon's picture

are you referring to ekm and I? we have never met. Ekm is a good guy though, i have no doubt of that.

Sat, 08/09/2014 - 23:25 | 5071818 Greenskeeper_Carl
Greenskeeper_Carl's picture

sorry, i thought thats who you were talking about when you said you talked to a person who had been banned from here. now i feel like an asshole

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