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Credit Crash Concerns Spark Biggest Investor Underweight Since 2008

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Alarm bells are starting to ring across multiple asset classes as we approach The Fed’s first double-rate-hike-in-3-months since 2006. The most concerning canary in the coalmine is US credit markets…

After a bigly run-up from the Feb 2016 lows – on the heels of unprecedented central bank cooperation – IG bonds began to break bad shortly after Trump’s election and HY bonds began to collapse as The Fed stepped up its jawboning and after Trump’s address to Congress…

And notably, this is not an “energy-specific” issue – the entire high-yield complex is selling off…

Participants in this month’s BofAML Credit Investor Survey developed significantly more bearish views toward high yield valuations.

The net proportion of investors expecting wider spreads one year from now jumped to 76% from the previous 23% in our January reading. This figure represents the greatest proportion of investors that expect wider spreads since May 2006, when high yield was trading at just 288bps.

Similarly, a net 85% of investors now find spreads overvalued compared to 67% in January, the highest figure since April 2007.

This bearish sentiment has caused investors to shift toward a net underweight stance on high yield (net 12% underweight), the first time a majority of respondents have been underweight since 2008.

Notably US Fiscal Policy is rapidly rising as the biggest concern for credit investors…

HY Fund outflows are surging…

So “storm in a teacup” or the “canary in the coalmine” – sentiment, flows, and positioning seem to signal the latter (but for now stocks don’t care).

As Bloomberg’s Simon Ballard notes, given the current backdrop of political uncertainty on both sides of the Atlantic and skepticism about whether a growth rebound can last absent stimulus, risk appetite seems to be wavering. It will be further tested if efforts by central banks to quash future inflationary pressure, resulting from loose monetary and fiscal policy, end up choking economic growth.


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