The bond bubble is right back where it started.
After a torrid three-week rally, high grade corporate bond spreads as measured by the BoA/ML Corporate Master Index OAS yesterday hit a fresh post-crisis tight level of 105bps, down from 105 bps on Tuesday and inside the low of 106bps from the summer of 2014. That's the lowest it's been in more than ten years, since July 18, 2007. The BoA/ML High Yield Master II Index OAS was 354 basis points yesterday, down from 355 basis points on Tuesday. That matches last Friday as the lowest since July 9, 2014, although at this rate, it too will take out post-crisis lows in just a few weeks.
What happens next? According to BofA's Hanks Mikkelsen, the rally has now paused and the bank's view is that "the big, rapid, initial move tighter is behind us." Mikkelsen believes that there were a number of catalysts for the rally to lose strength, including a lack of overnight buying as several Asian countries including China, Korea and Taiwan were on holiday. While Taiwan returns overnight, they are out again on Tuesday next week (after Columbus Day).
And yet, despite the brief temporary weakness in foreign demand the credit strategist continues to see large inflows to high grade bond funds/ETFs, including on average $813mn daily over the past ten business days (Figure 2) - and this is based on 50% of AUM so the real number could be twice as much.
In short, leveage may be at record highs...
... but the party is just getting (re)started, and demand for paper is on par with where it was at the peak of the last credit bubble.