We’ve written at length recently about the fact that since March, IG spreads have been outperforming HY.
That said, it’s possible that the HY rally, as undoubtedly stretched as it is, has further to run.
Why (well, I mean beyond the obvious fact that it’s benefited from the same risk-on tailwind as everything else)? Simple: supply and demand.
With the hunt for yield still firmly entrenched, a lack of new HY supply provides a technical tailwind.
Well, consider that just 22 deals priced in July for $10.6b, the lowest monthly volume since February 2016 and the lightest July since 2008, with the exception of July 2015.
Well, with more demand than supply, yields plunged to new three-year lows in July and, notably, yields fell for 10 consecutive sessions at one point during the month.
As Bloomberg notes, “there was no immediate catalyst for junk bonds to lose shine, as the VIX was close to multi-year lows and stocks were setting new highs amid steady rise in oil prices.”
In other words: “what could go wrong?”