Lipper reported a $3.28 billion in net outflows in high yield; quite close to the recent record of $3.4 billion withdrawn in June 2011 (YTD that number is $6.3 billion in outflows).
At a few notches below 500 bps in spread, it will be interesting how high yield continues to fare in the coming weeks. The sector has lost close to 3% from the peak in early May but observers still claim the asset class is rich. Interestingly, the asset class has lost gas not because of equity sell-offs necessarily but because of rate fears. Which brings us to another aspect in this reflation of credit: buyers who have flocked to high yield in the frothy stages have not been the regular high yield frolickers but folks who have been forced into the class to eke out a spread; a spread non-existent or thinned out in investment grade. Will this sell-off shake out the flighty crowd and re-establish the core crowd’s priorities? New issue calendars will tell.
And very interesting this week will the FOMC minutes and report, as the market wonders about the QE tapering and timing.
Have a good week ahead!
Investment grade +82 bps over swaps
High yield – $103 price, 6.25% yield to worst.
Emerging market +114 bps over swaps
The standoff between treasuries and risk were highlighted – and severely – in the last few sessions. The potential tapering off of QE would suggest that the economy is on a sounder track and does not need the adrenalin syringe of QE but the data to confirm that the economy is past the hump is skinny and spotty at best. Besides, if that were indeed true (that the economy is past the crutches of QE), then growth stocks would tear away from the safe sectors like utilities and REITS and we have not seen conclusive evidence of a long-term rotation there.
Of course, it is sensible to play to an eventual end of QE and the rise of rates and we have been saying that investment grade is the most sensitive to such an adjustment given the skinny spreads (see below) that do not quite compensate for the duration effect of rate moves. In the last month, an entire year’s income has been wiped off by the magnitude of rate moves. High yield looks a little better in this respect, with more spread vs. treasuries. But then investment grade continues to have forced buyers from the insurance world and ratings-handcuffed pensions and banks. Bereft of such handcuffs, one might find safety and return in higher quality “B” high yield credits than the investment-grade world.
Have a good week ahead!
Investment grade +80 bps over swaps (5 wider week over week)
High yield – $106.125 price, 5.45% yield to worst.
Emerging market +111 bps over swaps