While Carl Icahn's latest ramblings have brought attention to the 'bubble' in high-yield debt [7], we would note that the HY market has already dramatically diverged from the ongoing bubble in US equities and as we have been discussing for the past year, this is exactly the pattern we saw in 2008. However there is another aspect of the HY market that is flashing red, High yield debt downgrades are the highest since Lehman and the upgrade/downgrade ratio has tumbled to its lowest since the crisis...
"Price" has broken...
[8]
High yield debt downgrades are the highest since Lehman and the upgrade/downgrade ratio has tumbled to its lowest since the crisis...
[9]
The last time this happened, Bernanke unleashed QE3 - are we about to see the same in a massive surprise to markets?
There has not been this many downgrades since the crisis....
[10]
If indeed HY is a super bubble, then stocks have a major problem: the credit cycle has turned and a dismal dose of reality is about to come upon US equity markets as the rise in the cost of capital blows up the debt-fueled boom in buybacks... no matter how hard CEOs try to justify their compensation.
Charts: Bloomberg
