With HY supply drying up and the global, central bank-inspired hunt for yield still firmly entrenched, one could quite easily argue that there’s a technical tailwind for HY (i.e. less supply, still insatiable demand).
Indeed, Goldman did just that a couple of days ago. To wit:
The US HY primary market is set to have its second slowest July since 2010. With $13 billion of bonds issued by US HY companies as of July 26, this month’s volumes are only slightly above of the post-crisis record low reached in July 2015. In addition to seasonal factors, the slowdown likely reflects the pick-up in volatility in the rates and commodities markets in the first two weeks of the month. More importantly, the decline in new issue volumes has been a strong technical tailwind for secondary market spreads which have tightened by 21bp in July, the strongest month since February of this year.
That said, it’s probably worth noting – if for no other reason than it says something about shifting sentiment – a quick check of two very simple charts suggests that since March, the cash market has taken a much more favorable view of IG than HY.
Here’s the HY/IG spread ratio:
And a quick check of everyone’s favorite mom-and-pop corporate bond vehicles (which may or may not suffer for a horrific liquidity mismatch that will one day destroy the world), shows the same thing:
Of course if you’re determined to be bullish on junk, you could simply argue that all this shows is that as long as nothing upsets the risk asset apple cart, HY has more room to run than IG, especially considering the technical tailwind noted above and a more rosy outlook for crude.