The Global Fixed-Income "Blood Map" Of 2016

Tyler Durden's picture

For credit investors, 2015 was bad a year (for energy bonds it may have been the worst on record) culminating with the gating and liquidation of several credit-focused mutual and hedge funds.

However, judging by these heatmaps, 2016 is shaping up to be even worse.

The first chart below from Bank of America shows a YTD performance heatmap of all Global fixed-income performance. The variation in performance remains vast, but with plenty of areas still of "credit stress."  The one sector that is clearly working - for now -  is  sovereigns on the back of even more NIRP around the globe and $6 trillion in govvies trading with negative rates.

 

Unfortunately, for most other credit investors it has already been an miserable year, as the following Citi heatmap of YTD junk bond prices demonstrates.

 

But while junk is clearly a sea of red, what is most surprising is that in 2016 the worst performing sector on a relative basis is not high yield but US and European investment grade, as the contagion from HY spills over ever higher in the capital structure.

Behold: the US & Europe investment grade CDS blood map.

 

And here is the same for the entire world's IG CDS:

 

This is what Bank of America's Barnaby Martin says about this spillover:

We argued in late Jan that “stressed” high-grade names were trading very wide relative to the rest of the pack, and that this would make low-beta credits appear overvalued, leaving them at risk of repricing wider – in a kind of domino effect. We still see this as a big risk in IG and urge caution on low-beta credits.

For some IG investors it may already be too late. But before you dump those investment grade bonds and rush in junk on hopes the revulsion is over, read the following from another BofA analyst, Michael Contopoulos.

Couple a declining services sector with a manufacturing sector that is already in a recession and a declining global economy, and we continue to think high yield markets have substantially more downside ahead of them; particularly as non-commodity defaults pickup later this year.

 

Perhaps our greatest concern is that if we are correct on the fate of the high yield market and the broader US economy, the Fed has very little effective tools to combat such a scenario. With the fed funds rate at only 25bps and the Fed unsure if they are even allowed to implement negative rates from a legal standpoint, the only other tested instrument is a 4th round of quantitative easing. Except as we have seen in past QE rounds, the effects of repeated monetary stimulus have diminishing returns. Since Draghi applied the latest round of easing in Europe, volatility has actually increased. To this end we believe the path the Fed ultimately pursues is irrelevant to the credit market. In fact, we believe further stimulus would not calm the volatility in risk assets and may actually add to it as an acknowledgement of a worsening macro environment likely causes risk managers to dictate a dumping of securities and a hoarding of cash.

Yikes.

Source: Citi, Bank of America