Obbligazioni societarie HIGH YIELD e oltre, verso frontiere inesplorate - Vol. 1 (9 lettori)

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That high yield question
David Keohane Author alerts | Aug 11 11:14 | 10 comments | Share
Record outflows? Check.

Highly illiquid market that has been outstripped by demand and which may have become disconnected from reality? Check.

BTFD? Hmmm.

BofAML think “investors have capitulated out of HY bonds and that now is a good time to add exposure to an asset class still expected to deliver 7 – 8 per cent total returns in 2014″. Maybe, and there’s more in the usual place on that, but here’s the “don’t do it” version from RBS’s Alberto Gallo with which we have more sympathy:

1. Any potential change in Fed forward guidance comes from an unprecedented period of easing. You may or may not believe that Fed rates will go up next year (our US trading desk economists led by Michelle Girard forecast it to happen in mid-2015), but more Presidents and policymakers are getting worried about financial stability and the ineffectiveness of macro-prudential supervision, including Dallas President Fisher but also the IMF and the Treasury Borrowing Advisory Committee (TBAC). As unemployment gets closer to 6% and growth accelerates, we think low-for-long will come under additional pressure.

2. The plumbing of credit markets has changed since the crisis. Households and mutual funds own 37% of credit from 29% in 2007, according to Federal Reserve data, and liquidity is much scarcer.

3. Corporate fundamentals and investor behaviour have been increasingly exuberant, with firms re-leveraging to buy back shares and engage in M&A or LBO activity, and investors buying more complex products like pay-in-kind bonds, cov-lite loans in the US or contingent capital instruments in Europe. Our Junk Bubble Indicator (JBI), shown below, has been signalling overvaluation in the US high yield market for the past quarter as a result of these factors.



4. The ECB has limited ammunition available near-term to fight the Fed: yesterday’s press conference offered little except a good expectation of TLTRO take-up from banks (€450-850bn) and the news that the ECB is hiring a consultant to study a potential ABS QE programme. But against a potential turn in Fed policy, these words of “magic” can do little, as we said in yesterday’s Silver Bullet | More Mario magic?. Despite calls to counteract market turbulence or to engage in QE, consensus on any strong action remains fragile in our opinion, and will not come before the end of the comprehensive assessment (November).

5. Retail outflows and weak performance are strongly correlated. Credit ETFs made up for over 15% of the outflows, and they remain particularly vulnerable as we highlighted previously – being exposed to daily liabilities (redemptions) vs less-liquid assets (high yield bonds). The IMF specifically mentioned credit ETFs in the financial stability section of its last consultation on the US economy. Some high yield ETFs hold less than 0.5% cash.



And about the proposed exit fees on bond funds designed to cushion the market from a run? We’re still not sure why they aren’t going to exacerbate the problem. But again, maybe we’re missing something.
 

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