Ok, it’s time for another edition of “what freaks out BofAML’s clients the most.”
As you’re probably aware, the bank loves to do client surveys. Unfortunately, when BofAML releases the results of their polls, they don’t include fun recipes for “Grandma’s whiskey cornflake cookies” like Citi does (big shoutout to Laura’s grandma).
Anyway, the latest iteration of Barnaby Martin’s credit investor survey finds clients especially concerned about “quantitative failure.”
“August’s survey shows a marked change in the Wall of Worry [as] “Quantitative Failure” has now emerged as investors’ top concern (23%), up materially from June’s reading (6%),” Martin writes, in a note dated late last week. “Investors say that a backdrop of the ECB ending QE next year, while inflation remains sub-par, has the potential to rattle the market’s confidence.”
Indeed. Here’s the visual for both IG and HY:
As you can see, “bubbles” and “rising yields” are still holding their own in the top slots as well. You’ll recall our last update on this survey: “And Credit Investors’ Biggest Worry Is…”
Of course it isn’t surprising that € credit investors should be concerned about quantitative failure. After all, they’ve gotten a free ride on the back of CSPP and as you can see from the following chart, taper talk from the ECB has been just that – talk, when it comes to corporate bond buying:
Relatedly, here’s what respondents thought could “ruin the party” in € credit:
It’s important to remember that this is merely a microcosm of the larger dynamic at play across assets and across regions.
So while an ECB quantitative failure may well hit € credit especially hard given the fact that reducing purchases quite literally removes a price insensitive buyer from the market, it would also impact risk assets everywhere.
Because don’t forget, none of this happens in a vacuum.
Central bank liquidity is fungible.