More High Yield Dominoes Fall: BofA Warns "Rates Are Falling Victim Of Their Own Success"

Having exposed the many dominoes that are falling behind the high yield bond market previously, BofA's high yield strategy team are fearful that significant weakness in Emerging Market assets adds one more reason to remain cautious in markets.

If this was not enough to make credit market participants nervous...

Then BofA's Oleg Melentyev and Neha Khoda point out that last week it was Italy; earlier this week it was Turkey; now it is Brazil.

This week alone, the 2yr yields have gone up by 110bps in Turkey and 120bps in Brazil. This move was a culmination of a process that was accelerating over the past few months: the average EM sovereign local currency yield has gone up by 190bps since early May and by 255bps since late February.

We think a sharp 10bps intraday move lower in 10yr yields on Thursday is indicative of this environment.

Critically, BofA's analysts point out:

Rates are falling victim of their own success, where the further they go up the more vulnerability in risk assets they expose, leading to a negative change in risk sentiment and their own eventual reversal.

So far, the market treats these episodes as isolated and unrelated events and yet new problems are now popping up faster than the old ones being resolved.

In other words - the dominoes are falling.

And, as BofA concludes, if EM assets remain under pressure, it may be only a question of time before HY takes a hit, not for any particular fundamental reason, but simply by nature of their historical association. We think the HY market remains vulnerable over the near-term horizon to risk repricing in EM and EU, and as such we are further tilting our positioning towards a tactical underweight here.

What offsets some of this sentiment-driven overhang is the HY technical, which remains very strong. The market has generated close to $4bn in cash so far this week against only $1.3bn in new issuance. Next week, our data shows $3.5bn in coupons and $5.8bn in calls and tenders. The last time we saw a week of issuance exceeding $9bn was three months ago.

However, it is our sense that extreme risk sentiment changes could still overwhelm slow-moving technicals over short term time horizons.


SWCroaker Fri, 06/08/2018 - 15:06 Permalink

Rates are falling victim of their own success, where the further they go up the more vulnerability in risk assets they expose, leading to a negative change in risk sentiment and their own eventual reversal.

The above doesn't make sense.  

Rates don't think, don't feel, and aren't set to campaign to obtain success.  Countries get the rate from auctions where they either pay up in the face of perceived weakness, or walk away with fewer buyers than hoped for.

The fact that high rates at auctions also advertise desperation and risk associated with lending the country funds should not lead to a "fall in a reversal".   That should only come from a decrease in perceived risk, and more buyers than before show up to capture the high rates.

All of the above is old-school, from before the days when governments had central banks covering each others butts and buying to drive down rates to insane levels.

To me, that quote essentially says things can get so bad that they get better because they're really bad.   Wha??



taketheredpill SWCroaker Fri, 06/08/2018 - 15:35 Permalink


Think he's is talking about Central Bank rates, not rates in EM countries.


As far as HY however, when corporate rates rise (spreads widen) independent of what the Central Banks do (to rates) it will turn into an ugly circular trade:

- perceived riskiness rises

- investors sell HY and spreads widen

- HY corporate borrowing costs increases

- perceived riskiness rises

- Repeat

In reply to by SWCroaker

Dewey Cheatum … In.Sip.ient Fri, 06/08/2018 - 19:26 Permalink

Welcome, my friend to the new normal where old valuation models will never be a driver until a hard reset.

CB's are trapped and more of the same doesn't work anymore.

Even the smallest upside rate pressure, immediately crushes EM currencies due to the "new amount of FX leveraging and subsequently super-low liquidity.

This will be a devastating reset, absolutely no way to avoid it.

In reply to by In.Sip.ient

buzzsaw99 Fri, 06/08/2018 - 15:27 Permalink

If you let B of A manage your money I can tell you what your portfolio would look like no matter what your age:

junk bonds

junk bonds

us treasurys

conservative 0% yield

conservative 0% yield




MUNI Illinois 5.25%

MUNI California 4.75%

DB Euro bonds (read PIIGS+)

WF Euro bonds (read PIIGS+)

Shit Munis

Growth stocks

Growth stocks

Financial stocks

Index fund stocks.

Never, ever, let the bank manage your money for you. 

Never, ever, take their advice.

aeslong Fri, 06/08/2018 - 17:09 Permalink

junk bond crisis, junk bond crisis, equity "market" rallying every day to new highs, highs. yet bankster seems targeting other object. Trying to play trick of smoke and mirror?