US HY: watch out for take-off!
The disparity between cash and synthetic in High Yield (HY) has recently hit levels not witnessed since October 2022. While HY credit spreads in the cash bond market appear more resilient in response to the rapid increase in real rates, the CDX HY index, comprised of 5-year CDS of HY companies, has expanded by over 60 bps in just two weeks. The question now is, how long will this disconnect between the two markets persist? Source: Bloomberg #HighYield #CreditMarkets #Finance #Investing
Apollo just said that bonds are now more attractive than equities...
The spread between corporate bond yields and the S&P 500 earnings yield just hit its highest since 2008, at 1.5%. This spread was negative for nearly 13 years before turning positive in mid-2022. Even in 2020 this spread did not turn positive amidst the global lockdowns. Source: The Kobeissi Letter, Apollo
This chart by Goldman shows the regime change which has been in place over the last few weeks
Despite the rise in 30-year real yields, short duration stocks (i.e value and the likes) were underperforming long duration ones (i.e IT/growth stocks). Things are now normalizing as short duration stocks are progressively catching up in terms of relative performance. The growth/IT basket probably needs 30-year real yield to reverse trend in order to outperform again...
TIPS - A Revival in Focus!
Long-term U.S. Treasury Inflation Protection Securities (TIPS) have witnessed a significant double-digit decline since the start of 2022, despite the presence of high U.S. inflation. While the inflation-linked component has acted as a safety net, providing a cushion of around 10% over 20 months, the surge in the 10-year real rate from -1.0% to 2.2% over the same period has had a marked and negative impact on the total TIPS yield (-14%). Yet, the question lingers: Is now the opportune moment to contemplate TIPS? We are currently at a level of LT real rates (2.23%) not seen since 2008. Interestingly, TIPS exhibit a lower beta compared to U.S. Treasuries (currently standing at 0.8). This attribute becomes especially valuable in light of the considerable volatility in U.S. interest rates (with the MOVE index still >100). hould we delve into the realm of inflation-linked bonds, which constitute a global market valued at over $3.5 trillion? This consideration gains significance as uncertainties surrounding inflation persist, driven by factors like de-globalization, supply shocks, increased fiscal spending, and the ongoing transition to renewable energy sources. Source: Bloomberg
Markets summarized in one chart: Yields up, USD up and Equities down
Source: Game of Trades
Bond tracking ETF, $TLT, just closed at its lowest level since February 2011
The ETF is now officially down 50% from its high just 3 years ago in 2020. Yet, investors continue to desperately pour money into Treasuries despite the massive underperformance. Indeed, despite the rise in bond yields, investors keep piling into $TLT (iShares US Treasuries 20year+) etf. Another $750m last week as 60/40 portfolios are stubbornly allocating funds to this underperforming asset, hoping for a return to a disinflationary environment. As mentioned by Eric Balchunas / Bloomberg, it is quite rare seeing an ETF taking in so much money ($16b YTD, #2 overall) while being down so much and so consistently (especially when you can get just as much yield with no duration risk...). Such a behaviour happened with the China Internet ETF $KWEB... not a great omen... Source: Bloomberg, Eric Balchunas, Tavi Costa
Treasury notes, bonds, and mortgage-back securities account for over 80% of the Federal Reserve's balance sheet
Last week, the Fed's balance sheet plunged by almost $75BN last week, its biggest weekly drop since July 2020. The Fed's balance sheet is now over 10% below its April 2022 peak. But this is WITHOUT taking into account the current drop in value of the bonds held on the balance sheet. Indeed, if they were to be re-evaluated using a mark-to-market methodology, the Fed's assets could be reduced by another $1 trillion. To provide some context, he recent decline in market value would likely exceed the entirety of their QT policy thus far, which accounted for $939B. This would essentially revert their balance sheet size back to 2020 levels. Source: Bloomberg, Tavi Costa
A government shutdown would reflect negatively on America’s credit rating, says Moody’s, the only remaining major credit grader to assign the US a top AAA rating
“While government debt service payments would not be impacted & a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of US institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years,” analysts led by William Foster wrote in a report Monday. Source: Bloomberg
