Back in February, we brought you “Stocks May Be Asleep, But Credit Is Passed The F*ck Out,” in which we highlighted the fact that while both realized vol and the VIX are indeed asleep at the wheel (a testament to just how complacent equity investors truly are), credit is passed out drunk with its head in the toilet.
Simply put: spreads aren’t moving. And this applies pretty much across the board. USD, €, cash, synthetic, all of it. Everywhere you look… nothing.
In fact, as Barclays noted at the time the above linked post was published, US corporate spreads had gone 56 days with a one-week trading range below 3bps.
Just this morning we brought a new Goldman note to your attention in which the bank highlighted how forgiving US synthetic credit has been of late.
Meanwhile, if you look across the pond, French corporate spreads don’t seem to be pricing election risk efficiently and as Citi’s Matt King recently noted, “Brexit represents a significant potential negative for firms with heavy UK exposure [but] unlike in some other markets, credit seems thus far to be pricing nothing in.”
Well one person who has definitely seen enough is Deutsche Bank’s Jim Reid, who delivered the following subtle message in a note dated Monday:
Yes, “the most boring year ever!!!” – almost literally.
Consider the following…
Via Deutsche Bank
Is this the most boring year ever for credit? Figure 1 and Figure 2 suggest it is. Figure 1 shows the 10 least volatile years (as measured by the high-low spread range up to April 9 in each year) for each broad iBoxx index across the three main western currency blocks. Figure 2 is the same table but displays the actual high-low spread ranges by index rather than the corresponding years. On both graphs the highlighted cell is 2017.
For Europe, the overall IG non-financials index has only seen a stunningly low 6bps range so far in 2017 – the same number for single-As with BBBs incredibly trading in a narrow 7bps range. The ‘IG All’ corporate index includes financials and across the different rating bands is generally only marginally behind 2006 and/or 2007 as the least volatile year ever. Financials haven’t really been volatile but they’ve performed well, which gives them a higher spread range than had they had a more neutral year.
Virtually all Sterling and Dollar IG non-financial indices are also in the lowest three volatile years since the iBoxx indices started in 2000 with financials only generally just outside.
Both EUR and USD HY have also been relatively calm with only CCCs outside the top 4 due to strong performance. EUR Bs have seen their least volatile start to a year ever and by a considerable margin.
If that sounds like a recipe for disaster to you, that’s because it is.
Deutsche concludes: “Given that the VIX has just seen its lowest quarterly average reading since 2006, the above is probably not a surprise, but given the huge political uncertainty that abounds, there is some surprise at the overall macro extreme low volatility environment.”