Right, so junk is under pressure again on Tuesday.
I’m not entirely sure what to make of the commentary on this. There’s no “right” way to write about it. It’s almost a “see no evil, hear no evil, speak no evil,” type of deal.
Because if you’re trying to keep people from panicking, just about the last thing you want to do is tell people “not to panic.” The only thing worse than that is actually instructing people to freak out.
So the only option you’re left with is to say something like this: “look, this does have a coal-mine-canary-type feel to it, but who gives a fuck about canaries, right?”
The outflows are accelerating from the ETFs. There’s no question about that. Here’s an update on that point from Bloomberg’s Lisa Abramowicz:
Flows out of high-yield debt ETFs have continued. Investors have pulled $1.9 billion from just three junk-bond ETFs over the past week, $2.1 billion including loans. pic.twitter.com/MS0jjaEHqD
— Lisa Abramowicz (@lisaabramowicz1) November 14, 2017
Everyone is trying to read the tea leaves where that means parsing the selloff for signs that it’s largely based on idiosyncratic stories and/or checking the market’s proverbial pulse by looking for signs that the doors are still open to risky issuers.
All of that is a useful exercise in terms of getting a feel for what should matter, but I keep coming back to the same damn thing on this, which is that thanks to these ETFs, we are eventually going to end up in a situation where the tail is wagging the dog. In short: the arb mechanism on these things is going to break one day and the inherent liquidity mismatch is going to be exposed. Consider this from Peter Tchir:
Discounts to NAV in high-yield and leveraged loan ETFs open the market up to more selling pressure rather than less.
That’s presumably because FI traders will panic. Here’s Bloomberg’s Dani Burger, citing Tchir: “When fixed-income traders become concerned about illiquidity in a falling market they’ll perpetuate the selloff by driving down bond prices even faster than the ETF, or short the ETF as a hedge.”
It seems to me that if the NAV gets too out of whack, this could careen off the tracks. And this idea that because there are a lot of participants with a presumably diverse set of objectives, investment horizons, etc. etc. everything will work out ok, seems to ignore the rather self-evident fact that no one wants to lose money. So in that regard market participants are a pretty homogenous bunch.
Anyway, stepping out of the ETF weeds and back to a kind of 30,000 level, Goldman notes that according to history, spreads aren’t rising like they would if a recession were right around the corner and they’ll prove it with this colorful chart:
“Although credit spreads have historically widened in advance of recessions, we do not think the recent modest widening in high yield spreads are symptoms of a broader signal of economic slowdown now,” the bank writes, adding that “the ‘goldilocks’ macro backdrop of good growth and anchored inflation remains favorable for risky assets.”
And as long as Goldman says it’s fine, well then it’s fine. “Believe me.”