It’s a “dramatic shift”, but if you ask us, it’s not entirely surprising.
The latest edition of BofA’s US credit investor survey shows recession fears have all but disappeared over the past two months amid the melt-up in global equities and generalized good vibes associated with the Q4 pro-cyclical rotation.
“In fact, the survey-implied probability of a recession the next 12 months has dropped to 16.3%, down from the peak of 24.9% in September and not far off the unconditional probability if you believe there is a recession every seven years”, the bank’s Hans Mikkelsen writes.
In other words, there’s a sense in which recession fears really aren’t “elevated” anymore.
Naturally, this has had a positive effect on sentiment and that’s manifesting itself in expectations for high yield. “A net 36% of investors expect spreads to tighten [over] the next three months and a net 32% turned overweight”, Mikkelsen notes.
For high yield investors, holding above normal cash levels is increasingly out of style. At the same time, it’s getting more fashionable to hold less cash than usual.
In another sign of rapidly improving sentiment, 32% now see CCCs outperforming all other buckets across both IG and HY. That’s up from 17% in November and more than triple the 10% who expressed the same optimism around the junkiest junk in September.
Unsurprisingly, geopolitical risk topped the biggest worries list amid US-Iran tensions, besting even US election risk.
And, as shown in the right pane, expectations for the Fed to remain on hold indefinitely increased sharply from November.
That’s to be expected given the rather unequivocal communication from the December meeting, but what we would note is that given how far risk assets have run over the past two months, it’s remarkable that almost nobody seems to believe the melt-up will cause the Fed to consider hiking for the sake of heading off the risk of a bubble in financial assets.
Of course, you can’t really blame investors for their conviction. After all, the Fed is pounding the table pretty hard on the message.
“From a policy perspective, it’s going to be a pretty high bar for us to make policy more contractionary”, the Fed’s Bostic said Monday afternoon, during a moderated Q&A at the Rotary Club of Atlanta. “We’re going to want to let the economy run and run hot enough to where that inflation starts to move and get us to a place where we’re comfortable that the level where we’re at is not a threat to expectations”.