Why Credit Market Moves Are Now "Hyperbolic," Citi Explains

We’ve made no secret of our views on just how precarious corporate credit markets have become. 

For anyone in need of a refresher, the dynamic is very simple. The ZIRP-induced hunt for yield has driven investors away from risk-free assets and into anything that promises to generate at least some semblance of income. Corporate management teams have taken advantage of the situation to issue record amounts of debt, the proceeds from which have either been plowed into EPS-inflating, stock-boosting buybacks, or used to keep struggling businesses (like heavily indebted drillers, for instance) in business. The proliferation of fixed income ETFs and mutual funds have helped funnel retail money into areas of the bond market where it might normally have never penetrated. Meanwhile, Wall Street has pulled back from its traditional role as warehouser (i.e. liquidity provider). The result: record issuance of corporate credit and record low liquidity in the secondary market. In other words, a very crowded theatre, and an ever shrinking exit. 

Making matters worse is the fact that retail money tends to chase returns, resulting in a "positive" rather than a "negative" feedback loop, where mean reversion simply falls by the wayside.

With that in mind, we present the following graphic which, while simple, has quite a bit of explanatory value. 

Via Citi’s Matt King: 

Comments

[cowdiddly]

I luv how they now refer to this as the High Yield bond market now. They used to be called JUNK bonds for a reason.

With Moody's trip A rating of course.

[El Oregonian]

They've tried to turn a 'Moldy' Goose, into a 'Goldy' Goose... It won't matter, it will still run afoul (afowl).

[Sanity Bear]

I wouldn't call them hyperbolic, although they do exaggerate a lot.

[RaceToTheBottom]

I would call it a hydrocolonic drink

[Sanity Bear]

The EPA thread is thataway ---->

[razorthin]

Now there's a chicken that will never fit through the barn door.

[Richard Chesler]

What a bunch of pompous, technocratic terms for what can only be described as a "bullshit-driven market".

Thank you Mr. Yellen.