One of the dynamics that might not be readily apparent to anyone who focuses myopically on equities and/or easy-to-interpret measures of equity volatility is the extent to which credit has perhaps been the most resilient of all assets coming off the deflationary doldrums of February 2016.
If you follow credit markets, you know we’ve seen periods this year where you’d be forgiven for thinking traders simply went on vacation. For instance, recall this hilarious header from a Deutsche Bank note out in April:
If you missed that piece, you can check it out here, but do note this excerpt:
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.
So think about that in the context of this from Richard Breslow out Thursday:
The S&P e-mini future has just too much noise emanating from it at the moment. Especially as it gets knocked around at all hours. You’re better off watching some of the slower moving credit spread indexes to see how deeply these cuts are being perceived by real investors. Their long-term moves have been just as momentous as other assets but with much less zigging and zagging to the theme of the day. And don’t just watch U.S.-centric measures such as the Markit CDX North America IG Index, but also the Markit iTraxx Europe Crossover for signs, or lack thereof, of contagion.
Well, by comparison to the blowout that occurred around Brexit, spreads barely registered a blip on the radar screen amid the carnage Wednesday.
With that as the backdrop, consider the following brief excerpt and visual from Goldman whose credit team notes that when set against Wednesday’s selloff in equities, HY’s relative resilience ranks in the 94th percentile versus history.
Weekly HY outperformance vs. SPX ranks as one of the greatest in 2 years. The growing concern over the US political environment and the continued erosion of confidence in the policy agenda drove the S&P 500 1.8% lower on Wednesday, the biggest one-day drop since September 9 after setting record highs in tight intra-day trading ranges. The impact on credit was somewhat more modest with HY bonds losing -0.11% and IG gaining 0.6% over the same mid-week session. Exhibit 2 puts the magnitude of the credit outperformance in context and shows historical percentiles of the beta-adjusted weekly returns of various pairs of cash and synthetic indices in addition to the S&P 500. The heat map shown in Exhibit 2 flashes red when the index on the left side has outperformed its beta to the one at the top, and blue in the opposite case. Taking these estimates at face value suggests the weekly outperformance of HY cash vs. the S&P 500 ranks in the 94th percentiles vs. the history of the past two years—i.e., the outperformance has only been greater in 6% of the sessions in two years while the synthetic CDXHY vs. SPX outperformance ranks in the 77th percentile.
The relative performance in part reflects the heavy concentration of stocks such as AAPL, with the world’s largest market-cap, which lost 3.4% on Wednesday, a major factor driving S&P lower, while the weakness in financials was also felt more acutely in the equity vs. the credit markets, with little upside from potential de-regulation left in the former.