Is High Yield Credit Echoing 2011's Equity Nightmares?

Tyler Durden's picture

For the last month or so, despite ongoing fund inflows, high-yield credit's performance has been generally muted. Compared to the exuberance of the equity market it has been downright flaccid and given how 'empirically' cheap it is on a normalized spread basis through the cycle (and the fortress-like balance sheets we hear so much about) some would expect it to be the high-beta long of choice in the new-new normal rally-to-infinity. However, it is not (and has not been since late January). There are some technical factors including a bifurcated HY credit market (between really 'good's and really 'bad's and illiquids and liquids), low rate implications on callability and negative convexity affecting price but the lack of share creation in the HYG (high-yield bond) ETF also suggests a lagging of support for high-yield credit. This is a very similar pattern to what was seen in Q1/Q2 last year as equity kept rallying away from a less sanguine credit market only to eventually collapse under the weight of its own reality-check. European credit and equity markets are much more in sync together as they have fallen recently but financials in the US exaggerate this credit-signaling-ongoing-concerns trend while equity goes on about its bullish business. Another canary dead?

High-Yield Credit vs Stocks in 2011...

High-Yield Credit vs Stocks 2012...

HYG (the high-yield bond ETF) has seen shares outstanding stagnate for over a month (no new creation suggesting less demand)...

and its not just yield-based HYG but spread-based HY17 (the credit derivative index for high yield credit) that has been relatively stable (and note the divergences and convergences - especially recently as HY17 headed into its index roll)...

and US financials remain extremely exuberant relative to credit (as opposed to European financials which have reconnected with reality)...


Charts: Bloomberg

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YesWeKahn's picture

compression trade: buy credit/short equity?

tempo's picture

Per Chris (pee on my leg) Matthews...With Obama working tirelessly over 4 years and the 60 votes in the Senate and majority in Congress voting for the healthcare bill,the Court wouldn't dare destory his legacy. Of course if it is overturned then the number of poor and children covered will be increased from 50%, 55%, 60%, yes 65%, then 70% of the population through the annual budget reconciliation process. It will be a Republican nightmare. The progressive do not even conceive there is a remote possibility that the budget deficit will not grow and grow. Deficit spending is endless and wonderful!! (of course until it ends).

q99x2's picture

This time its different.

infiniti's picture

How can I get a job working on the Zero Hedge prop desk?

nbsharma's picture

i have the same question.

Lady Heather...UNCLE's picture

as with all things when one uses leverage (as nearly all traders do)...timing is everything. Yes reversions to mean occur...but when. As the old adage goes" do not tell me WHAT to buy, tell me WHEN to buy"  Eliot Wave International have been the worst prognosticators of equities in the history of forecasting> They are TERRIBLE. But one day they will be right...all their subscribers wont profit however, because they're broke!

5880's picture


just keep doubling up.......  :-)

meetired's picture

Got a man crush on this poster.

But it is just confirmation bias.

trulyslide's picture

In Jim Cramer's Mad Money Recap today - Hating Stocks Hurts Your Wallet. A winning strategy is to buy what you love. Apple, Chipotle, Panera Bread. Look around your house - Clorox! Also might want to snap up some hot new IPOs. Everybody uses Linked In, Zynga, it's so easy now.

meetired's picture

Gee, thanks.  I just threw up in my throat.

And which genetic defect causes you to watch CNBS anyway?

Inquiring minds need to know what to get tested for.

trulyslide's picture

Don't watch CNBC, just started following his Twitter feed for the comedy.

DeadFred's picture

Cramer's Twitter feed is one of the best conta-indicators there is. Stolper is more useful when he says something but Cramer is on Twitter all the time.

meetired's picture

Don't FAZ me, bro!

LongSoupLine's picture

three words...


massive. margin. call.

meetired's picture

No way to call margins on stupidity.

meetired's picture

Skittles - taste the Rainbow.

meetired's picture

What my man crush poster really means, but never says, is that the biggies always bring the pig back to VWAP, and when they don't, short the CIT outta this pig.

bag holder's picture

For those of us too, ahem, proletarian to afford a Bloomberg terminal, is there somewhere else to look at charts of HY17?