Ok look, I know we’ve said this over and over.
But the evidence just keeps piling up.
High yield credit is a goddamn bubble. And it refuses to burst.
Hell it was just yesterday when we noted that if you want to know just how resilient junk has become, you need only look at Wednesday when, in the face of crashing equities and spiking vol, HY managed to hold up so well that its relative performance (vis-a-vis the S&P) was in the 94th percentile versus the history of the last two-years. More generally, credit barely budged relative to the downward pressure on stocks. Look at the SPX column:
So there’s that and then there’s the fact that the last time spreads were this tight, oil was at something like $90/bbl. That’s why the likes of Bill Gross have come out recently and said simply: “I don’t think high-yield spreads have any more to compress.”
Well, in case you needed further evidence that the market is far too sanguine on junk, have a look at this:
As Barclays notes, “net longs (sold protection positions) in the on-the-run index have gone from the 81st percentile at the start of 2017 to the fourth percentile currently on a three-year horizon.”
Read that again: from the 81st percentile to the 4th in the space of five months.
To be sure, there’s some nuance here (note the discrepancy between the net longs on all series versus sold protection on OTR) and it’s certainly possible that these numbers are being inflated by the continual substitution effect that’s seen managers opting to express bullish views via sold protection on more liquid CDS indices instead of taking liquidity risk by expressing the same directional view in less liquid cash bonds, but the point stands. People are really long.
We’ve been the boy(s) who cried wolf on HY for some time now and while we realize there’s some reputational risk involved with being a broken record on trades that never seem to unwind, regular readers know that given our “checkered past”, “reputational risk” isn’t something we’re overly concerned about here at HR…