There is a glaring divergence between the performance of US equities and high-yield credit's spread over investment-grade credit. As BofAML warns, "either HY rallies or stocks soon in a bit of trouble," because the only pillar left to hold up the fragile un-bubble-like stock market - buybacks - will disappear if costs of funding start to surge (there's always a limit to the leverage a credit cycle will bear). The more concerning aspect is that it appears investors are already rushing for the doors... as this week saw the largest HY outflows in over a year.
HY better rally soon - or stocks are in a bit of trouble...
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As last week saw massive outflows from HY...
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The biggest HY outflows since last summer's Taper Tantrum as perhaps the professionals realize the repo market's breakdown is something to worry about...
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This week alone has seen major derisking in HY...
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Simply put, the Fed can't have it both ways - if they think HY credit is in a bubble then it directly implies costs of capital for stocks are too low and thus stock prices too high...
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Just to be clear - this is not a "rotation" excuse from HY corporate bonds to stocks - the two assets are intricately exposed to exactly the same underlying business volatility on an idiosyncratic basis... if credit spreads start to widen (which they are) and the endless demand that has enabled massive issuance used for buybacks starts to weaken (which it is) then the hopes of this bubble ending well - as firms are forced to admit just how weak 'real' earnings are when unadjusted for shrink-floating manipulations...
