We have been warning of the uncomfortable current similarities to last year's (and for that matter cycle after cycle) high-yield credit underperformance / lagging behavior 'canary-in-the-coalmine' relative to the exuberant equity market for a month now. The price action has been summarily dismissed by the bulls as negative convexity-based, low-rate based, or apples-to-oranges comparisons - despite all of these throw-away lines being shown to be irrelevant when considered correctly with bottom-up comparisons showing just what we have been seeing - a much more concerned and less sanguine credit market than equity market. Now, Bank of America provides - in two succinct charts - the fundamental underpinning of this grave concern as across the high-yield credit universe revenues are not catching up with costs - creating significant margin pressures - and at the end of the day, a market that cares more for cash flow sustainability than the latest headline or quarter EPS upgrade from some sell-side pen-pusher is waving a red-flag as margins are the lowest they have been since March 2009 and is falling at a much faster clip than in the fall of 2008 as the reality of money-printing comes home to roost. And just to add salt to this fundamental wound, technicals are starting to hurt as supply picks up and 'opportunistic' issuance turns notably heavy - perhaps helping to explain how the ongoing inflows have been unable to push prices further up in the US. Lastly European high yield is trading tick-for-tick with sovereign risk still - as it has since the middle of last year and so as LTRO-funded carry fades, we would expect it to underperform - especially as austerity slows growth.
Warning Sign: revenues not catching up with costs...
[9]
...creating significant margin pressures...
[10]
And technical supply pressure is building...
[11]
While European High Yield remains joined at the hip with European Sovereign risks...
[12]
Source: BAML