We’ve made no secret of our views on just how precarious corporate credit markets have become.
For anyone in need of a refresher, the dynamic is very simple. The ZIRP-induced hunt for yield has driven investors away from risk-free assets and into anything that promises to generate at least some semblance of income. Corporate management teams have taken advantage of the situation to issue record amounts of debt, the proceeds from which have either been plowed into EPS-inflating, stock-boosting buybacks, or used to keep struggling businesses (like heavily indebted drillers, for instance) in business. The proliferation of fixed income ETFs and mutual funds have helped funnel retail money into areas of the bond market where it might normally have never penetrated. Meanwhile, Wall Street has pulled back from its traditional role as warehouser (i.e. liquidity provider). The result: record issuance of corporate credit and record low liquidity in the secondary market. In other words, a very crowded theatre, and an ever shrinking exit.
Making matters worse is the fact that retail money tends to chase returns, resulting in a "positive" rather than a "negative" feedback loop, where mean reversion simply falls by the wayside.
With that in mind, we present the following graphic which, while simple, has quite a bit of explanatory value.
Via Citi’s Matt King:
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