Ok, well if you were concerned about high yield, maybe you shouldn’t be. Or at least not in the near-term. Because thanks in part to surging crude prices and what’s being billed (rightly or wrongly) as a de-escalation in trade tensions over the past two-weeks, spreads on U.S. junk are back near post-crisis lows.
In fact, at 314bp, we’re within spitting distance of the January 26 tights and according to JPMorgan, data from Lipper shows investors dumping some $2.3 billion into high yield funds between April 12 and April 17.
As Bloomberg notes, “if sustained through today, it would be the biggest biggest high-yield fund inflow since the week ended January 10.”
In a testament to just how quickly things have taken a turn for the better after a rather tumultuous stretch earlier this year tied to broader market volatility, last week HYG had its second-best week in a year and as BofAML notes, the 1.2% gain represented “a top-10 percentile move so far in this credit cycle [and was] on par with rebounds from fear-driven lows post-US election in Nov 2016, post-energy meltdown in Feb 2016, post-taper tantrum in Jun 2013, and post-EU breakup inflection points in 2012, 2011, and 2010.”
Needless to say, all of this could turn on a dime in the event there are fresh signs that the cycle is turning or that the trade wars about to escalate further, but for the time being, it looks like HY is back.
One still wonders though, whether the cycle even needs to turn to see the cracks start to form because once CSPP starts to be wound down in earnest in Europe, you’re going to see the dynamic illustrated in the following chart from Citi start to reverse itself and that should impact HY first, although clearly, the U.S. experience will likely be less acute than the European reaction.
