Since the Greek PSI deal was announced early on Friday morning, European credit markets have been underperforming European equity markets quite materially. Friday in the US held up in a narrow range for a short-period but once we discovered that the CAC was in fact a credit event thanks to ISDA, the US credit market deteriorated rapidly and remains weak as US equity indices are holding stable. We wonder, with CBs seemingly on the sidelines for now and fall-out from the Greek deal remaining uncertain, whether credit is once again reflecting market angst more efficiently than the marginal robot in equity markets.
European Equity vs Credit...
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US Equity vs Credit...
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Notice that in the US, the IG index (which is investment grade credit spread based) is outperforming high yield (HY). We suspect this outperformance contonues to be an up-in-quyality rotation that we have been discussing for some time (and the cheapness of the HY-IG decompression RV trade). Furthermore, the IG index does not contain any of the major financials in the US (unlike the European index) - which is where most of the underperformance has been recently.
Charts: Bloomberg