The last few days have seen high-yield credit markets remain remarkably resilient in the face of an equity downdraft. Both HYG (the high-yield bond ETF) and HY18 (the credit derivative spread index) have remained notably stable even as stocks have lost over 3% - and in fact intrinsics and the underlying bonds have improved in value modestly. HY bonds are much less sensitive to interest rate movements (especially at these spread levels) and so, in general, this divergence in performance is aberrant (especially with equity volatility also pushing higher in sync with stocks and not with credit). So why is high-yield credit not so weak? The answer is surprisingly simple. As we argue for weeks from the end of LTRO2, credit markets were far less sanguine than stocks and have leaked lower ever since. This 'relative' outperformance of high-yield credit over stocks appears to be nothing less than the last of the hope-premium bleeding out of stocks and re-aligning with credit's more sombre 'reality' view of the world. Given the sensitivity of HYG (and HY) to flows, and the weakness in risk assets, we would suspect that outflows will now dag both lower as they resync at these higher aggregate risk premium levels.
Comparing SPY (the S&P 500 ETF) with HYG and JNK (the high yield bond ETFs) provides an optical indication of this divergence in risk appetite (or hope)...
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and more clearly here - with SPY modeled off HYG's behavior - it is clear that the start of the year saw stocks become ebullient as the short-squeeze and USD nominal value excitement impacted stocks while credit (numeraire-less) remained far less sanguine at the long-term impact of LTRO and Twist...
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Charts: Bloomberg