The Scariest Chart For High Yield Bond Holders
We have been pointing to the 'changes' that are evident in the high yield credit market (bonds, credit derivatives, and ETFs) for a few weeks now. The fall in the high-yield bond advance-decline line (and up-in-quality rotation); the decompression of HY credit spreads; and the lack of share creation, discount to NAV, and underperformance of JNK/HYG; but these canaries-in-the-coalmine pale in comparison to the massively over-crowded nature of the high-yield credit protection bullish positioning among arguably levered market participants. As Morgan Stanley notes: "US High Yield Investors Are 'Full Overweight'". Remember large crowds and small doors are no fun.
The only reason to be this long HY right now (with leverage rising, cash/debt falling, and potentially the liquidity spigot of central banking running dry) is if it is paired against an S&P 500 short as that is the only other high-beta asset class that remains absolutely ebullient.
The primary HY market remains active (especially for European issuers) but concessions are dropping and yields becoming less and less attractive even to yield-hungry carry-chasers (unless they can basis-trade it away).
The other item of note with primary issuance is a preference for quality junk - as opposed to junk junk - i.e. we want some yield but don't wanna buy the next Kodak.
However, if this volume of net longs ever gets itchy feet then the contagion to an already illiquid cash market will be spectacular.