No matter how much pushing on the market- or economic-string a central planner tries, eventually the risk-based pricing of credit (as opposed to nominal price based stocks) turns the corner from accepting rising leverage as potentially good thing for growth to worrying that cash flows are at risk from an over-generous management transfer to shareholders. The four-year bullish period of this credit cycle is nearing its historical average and leverage is near its cycle highs with near record numbers of firms raising leverage YoY suggesting the credit cycle is over.
Leverage is rising...
and pretty much every other credit metric is deteriorating...
[4]
and the credit cycle is getting long in the tooth...
[5]
[6]
It seems the only factor driving credit from not being wider based on these leverage and cycle indications is the 'flow' from the Fed. We suspect that is what has created the weakness in bonds recently (even though we note that cash bond markets have not weakened as much as CDS since managers are preferring to hedge than cover for now - since, quite bluntly, they know that if they all collaborate and don't sell then everything is fine but once one manager decides to cover instead of hedge, the small doors and large crowds will see major liquidity gaps appear in HY credit).