It looks like the disconnect between IG credit and equities is going to be something folks are keeping an eye on for the foreseeable future (i.e., until it resolves itself, either by equities catching down to credit’s reality or by credit rallying to catch up to stocks’ relative exuberance).
I went over this on Friday in the context of a recent Goldman options note and then revisited it over the weekend in the context of a burgeoning “bifurcation of risk premia” (to quote Deutsche Bank’s Aleksandar Kocic) story that finds credit saying something different than, for instance, FX vol.
Within credit, there’s an interesting narrative revolving around the notion that IG may be paradoxically more risky in some respects than HY, assuming accommodative policy continues to prolong the cycle, suppress defaults and otherwise prevent junk spreads from widening to reflect what some folks have described as “grotesque” leverage and/or idiosyncratic, company/sector-specific risks. IG, on the other hand, has become a duration story, and as the above-mentioned Kocic recently wrote, is now associated with macro-systemic risk.
And blah, blah, blah.
No, I mean this is an important story, but we’re kind of just rehashing things at this point. But hey, fuck it, right? That’s what Mondays are for.
Well, speaking of rehashing this, Goldman is out with their most recent GOAL weekly kickstart piece and IG versus equities is on the agenda.
This disconnect is manifesting itself in cash and synthetics.
“At the index level, a gap has opened between cash credit spreads and equities, most notably in US IG credit compared with the S&P 500,” the bank writes, before noting that . “synthetic credit and equity vol also indicates CDX IG is higher than would be implied by S&P 500 implied vol.for the first time this year.”
So who cares? Well, you do – or at least you should. If you’re in the camp that thinks credit knows something equities don’t, well then this is disconcerting, especially to the extent that IG is saying something about macro-systemic risk.
On the other hand, this could simply reinforce the argument for stocks, at least in the near-term.
“It is not unusual for US HY spreads to widen for a period of time, but for equity to actually have positive performance over the same period,” Goldman continues, adding that “the same is true for US IG spreads – these periods are generally longest and occur most frequently in the late cycle.”
Of course all of that assumes there’s noting insidious going on here and that global growth will chug along. Obviously, you don’t want to be in stocks, if “something wicked this way comes” (so to speak).
Whatever the case, the outlook for credit doesn’t seem to be particularly compelling, especially considering that TINA is dead. Or at least sick.
That said, TINA’s untimely demise doesn’t bode particularly well for stocks either, but I guess if you’re determined to take risk, equities may be a better bet right now than credit.
