All kinds of people are suddenly talking about the bubble in high yield.
Of course if you’ve been paying attention, you know there’s been a bubble in junk for most of this year.
The spread tightening off the February 2016 deflationary doldrums has been nothing short of spectacular and notably, USD HY has been remarkably resilient this year in the face of crude prices that have, at various times, looked to be on the verge of collapsing to a 30-handle (aside: it’s important to note that amid the grind tighter, IG has outperformed – this sounds esoteric, but it’s a dynamic that you should be aware of).
Well starting in July, it looked like the party might be coming to an end as issuance all but evaporated, but you have to understand that when a dearth of supply meets insatiable demand (i.e. hunt for yield), the result is a strong technical tailwind that drove spreads even tighter.
Over the past several days, the rally slammed on the brakes amid the broader risk-off move. As Bloomberg notes, “yields have had a roller coaster ride as they surged to a 5- week high from a 3Y low in one week.”
Meanwhile, everyone’s favorite liquidity-mismatched nightmares (a.k.a. HYG and JNK) have had a decidedly rough go of it as spreads blew out:
As for flows, here’s what the picture looks like for HYG and JNK (combined):
To be sure, there are reasons to believe the bond market is still some semblance of healthy. There’s an argument to be made that the underperformance of lower rated credit (i.e. amid the tightening, who’s been tightening the most?) suggests markets are acting rationally as opposed to everyone piling into everything (rising tide, all boats, shit like that).
Still, the writing is on the wall for HY. Fortunately, if you don’t like USD junk anymore, you can always buy € junk – after all, it’s safer than Treasurys…