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...
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High-Yield Credit vs Stocks 2012...
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HYG (the high-yield bond ETF) has seen shares outstanding stagnate for over a month (no new creation suggesting less demand)...
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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)...
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and US financials remain extremely exuberant relative to credit (as opposed to European financials which have reconnected with reality)...
[12]
Charts: Bloomberg