For as long as this site has been around (which admittedly isn’t very long), we’ve been saying that the rally in high yield has run its course.
There are two common sense reasons to think that’s true:
- the spread compression off 2016’s deflationary doldrums has been nothing sort of monumental (i.e. the rally has been “yuuuge”)
- the last time spreads were this tight, oil was trading around $90/bbl
To be sure, that assessment is more anecdotal than it is scientific, but if you look at this chart, you’d be hard pressed to say our back-of-the-cocktail-napkin-ish (Heisenberg doesn’t write on envelopes) argument doesn’t make some measure of intuitive sense:
When you throw in HY’s tendency to become more correlated with commodities when the latter sells off and then consider the recent price action across the commodities complex, this argument becomes even more compelling.
One person who agrees is Bill Gross.
The best trade out there right now? According to Bill Gross of Janus Capital, it’s shorting credit spreads using corporate credit default swap indexes.
The Janus Global Unconstrained Bond Fund that Gross manages has shorted credit spreads using CDX, and the trade “makes all the sense in the world,” Gross said in an interview with Bloomberg TV at the Milken Institute Global Conference in Beverly Hills, California. “I don’t think high-yield spreads have any more to compress,” he said.
You can listen to Bill explain it starting at the 9:17 mark here and you can listen to him talk about himself in the third-person (“what does Gross do?”) at the 7:55 mark.
Or, summed up: