About a week ago I noted, with some amusement, that Citi was running a client survey to help determine how market participants see the high yield story panning out.
As regular readers are aware, there are no shortage of headwinds for the space which, thanks higher oil prices, has seen spreads compress dramatically since the February 2016 doldrums. Here’s a (by no means exhaustive) list of potential HY land mines:
- tax reforms that eliminate the deductibility of interest could offset the benefits of lower statutory rates for highly leveraged firms
- the concentration of ownership in the hands of those who have shown a high propensity to sell in a downturn makes the space vulnerable to a panic
- the lack of liquidity in secondary cash markets for corporate bonds creates a scenario where unloading these assets in a pinch could very well ignite a firesale
- the fundamentals are God awful
And I could go on.
Still, the crowd is an optimistic bunch, so when Citi asked the following question earlier this month…
…I already knew what the answer was going to be.
Sure enough, the results of the survey came out this morning and wouldn’t you know it…
Note that HY energy trading inside of HY as a whole is inline with historical precedent, but betting on a reversion to that precedent is effectively a bet on oil prices going higher and, well… you know what I think about that.
Don’t forget shares outstanding in the largest oil ETF just plunged to a 13-month low.
“You gotta be super smart to trade credit, buddy, it’s not easy”…