Right, so as Monday morning’s price action pretty clearly demonstrates, there’s not a whole lot that risk assets can’t shake off when everyone is hell-bent on being obtuse.
And, as former FX trader Richard Breslow wrote earlier today, why the fuck wouldn’t you be willfully ignorant, because the second you start trying to trade against central banks is the second you “get your eyes ripped out.”
Be that as it may, there’s one space that quite literally looks like it just can’t possibly rally any further and that’s high yield. Recall Bill Gross’s assessment from a couple of weeks ago:
“I don’t think high-yield spreads have any more to compress.”
You’ll notice that kind of sentiment emanating from a lot of folks and the important thing to note about it is that it isn’t necessarily an attempt to express an overtly bearish position on risk as much as it is just looking at HY and not being able to conceptualize how the market can rally any further even under them most favorable of conditions.
That’s why last week’s flows data for HY was pretty interesting. We saw $1.5 billion in outflows from HY funds, nearly all of it from ETFs:
(BofAML)
Meanwhile, spreads actually tightened by 4bps. Here’s BofAML:
US HY funds experienced a $1.5bn (-0.64%) net outflow during the week ended May 10th, the largest withdrawal in 2 months. However, almost all of these redemptions (-$1.54bn, -3.35%) came from HY ETFs whereas open-ended funds actually saw a modest $38mn (+0.0%) inflow. While it is somewhat surprising that the former lost money to outflows during a week when spreads tightened 4bps, ETF flows tend to be more volatile and driven by institutional activity compared to their open-end counterparts. We would therefore view last week’s US HY flow as mostly noise and believe retail demand is steadier than what the headline figure suggests.
I guess. I mean after all, you can depend on retail to ignore anything that even approximates common sense until some kind of negative catalyst is immediately apparent.
Well, according to BofAML’s most recent client survey, folks are indeed finding it harder and harder to justify an Overweight position. To wit:
When we couple the above with tight valuations, where our clients this month continue to indicate that they find high yield spreads overvalued, we think should retail flows turn negative or equity markets selloff, high yield is likely susceptible to a backup. In fact, in this month’s survey, it seems investors have agreed with our positioning call to reduce exposure, and have consequently increased their net underweight positioning relative to our March survey.
Additionally, a net 58% of investors currently expect wider spreads 12 months from now, the 2nd highest proportion since May 2006.
And similarly, a net 19% of investors are now underweight high yield, a slight deterioration from March’s 12% and the most pessimistic outlook since June 2008.
Market positioning For the 3rd consecutive survey, investors reduced their overweight positioning to high yield. The net overweight positioning among high yield investors dropped to -19% in May, from -12% in March and +24% in our January survey (Chart 3).
Views on valuation. The net percent of respondents finding high yield spreads overvalued declined slightly, to 78% in May from 85% in March. Over that same time period, spreads have declined by a modest 7bps (Chart 4).
Needless to say, if we were to get any further “anomalous” crashes in commodities over the coming weeks and/or months, that would only add to the bear thesis which, as is pretty clear from the survey results excerpted above, is rapidly becoming “consensus.”
