Here's Why High Yield Credit Is Not Selling Off Like Stocks (Yet)

Tyler Durden's picture

The last few days have seen high-yield credit markets remain remarkably resilient in the face of an equity downdraft.  Both HYG (the high-yield bond ETF) and HY18 (the credit derivative spread index) have remained notably stable even as stocks have lost over 3% - and in fact intrinsics and the underlying bonds have improved in value modestly. HY bonds are much less sensitive to interest rate movements (especially at these spread levels) and so, in general, this divergence in performance is aberrant (especially with equity volatility also pushing higher in sync with stocks and not with credit). So why is high-yield credit not so weak? The answer is surprisingly simple. As we argue for weeks from the end of LTRO2, credit markets were far less sanguine than stocks and have leaked lower ever since. This 'relative' outperformance of high-yield credit over stocks appears to be nothing less than the last of the hope-premium bleeding out of stocks and re-aligning with credit's more sombre 'reality' view of the world. Given the sensitivity of HYG (and HY) to flows, and the weakness in risk assets, we would suspect that outflows will now dag both lower as they resync at these higher aggregate risk premium levels.


Comparing SPY (the S&P 500 ETF) with HYG and JNK (the high yield bond ETFs) provides an optical indication of this divergence in risk appetite (or  hope)...

and more clearly here - with SPY modeled off HYG's behavior - it is clear that the start of the year saw stocks become ebullient as the short-squeeze and USD nominal value excitement impacted stocks while credit (numeraire-less) remained far less sanguine at the long-term impact of LTRO and Twist...

Charts: Bloomberg

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Mugatu's picture

There's a shit storm coming!

All the bulls better remember that when you have a Bernanke PUT, you also have a Bernanke Premium.  Premiums usually mean you overpay.

TLT's picture

^BVSP all day without any quotes (Brazilian Stock Market). RBS with problem with ATMs for 5 days. France lowering withdrawal limits.

Imagine one day that you wake up and everything is closed. Your money in your bank account frozen or turning into dust due to hyperinflation, bank holidays and so on.

Have the decency to HAVE SOME PHYSICAL GOLD. NOW. Protect your wealth. Protect what you have worked so hard for. Crush this stupid system that only benefits a few!

Silversem's picture

I also think a big storm is coming. But i think it will be great for smart traders. The volatility on the financial markets will skyrocket. This means potentially stellar gains, especially when using a leverage instrument like CFD.

brainwashed's picture

Japanese yen also exhibited some unnatural correlation with equity losses Wednesday-Friday last week, i.e. it weakened along with the equities. Normally these two move in very opposite directions. JPY may have run a bit too far last month on the crosses and thus the correction was more prolonged than probably anticipated. However, monday's action seems to indicate that it's also starting to point towards continued weakness in risk assets at least in the short-term.

IMA5U's picture

equities are too volatile  


more $ will be allocated to fixed income