Two weeks ago we warned of the 'shift' we were seeing in the high-yield credit market [2]. Equity market participants remain bereft of the ability to realize that releveraging to fund buybacks (which are the only driver of EPS growth [3]) and dividends (the only reason many are buying stocks) is simply not long-term sustainable. The reason - quite simply - is that high-yield markets (no matter how much liquidity you throw at them) will hit a wall of spread-per-leverage or 'risk' vs reward that simply is non-economic. As we noted here [2], we appear to be turning the credit cycle corner - a message many ignored just as vehemently in 2007. The last few days have seen credit markets take another leg lower (remember this is spread not yield risk and so is unrelated directly to the Treasury selloff). To clarify, one cannot believe that investors rotate from HY credit to equities - they are simply different parts of the same capital structure; if one hurts, the rest of the business will hurt (perhaps with a lag) and in this case (as is often the case), credit anticipates and equity will confirm.
Short-term...
[4]
Longer-term...
[5]
Charts: Bloomberg