Sunday, November 18, 2012

HY markets hit by outflows; correction likely short-leved

As credit markets sold off last week (see discussion), high yield bond funds saw the largest outflows since this summer (during the market squeeze on Spain). HYG, the HY ETF alone saw a $219 mm worth of shares outflow in a single day.

Click to expand (source: JPMorgan)

This was a much needed adjustment to put some risk back into the market that has been frothy for quite some time now (see discussion from August - of course at the time a number of financial journalists professed that HY was still cheap).

Alex Dumortier of the the Motley Fool had a great chart showing the narrowing of HY vs. S&P500 outperformance. There is clearly a limit to how much the two markets can diverge.

Source: Motley Fool

This correction however will likely be short-lived, given the ramp up of the Fed's balance sheet expansion program. It's not as much about the fundamentals as it is about the supply. The reduction of spread product available in the market via MBS purchases and extraordinarily low rates will provide support to credit markets in general and the higher quality HY paper in particular (in spite of record issuance).
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