Since the beginning of 2018, US credit (via ICE BofAML) total return performance across credit ratings is beginning to draw some concern. I'll highlight a few of those concerns below:
- Since the beginning of 2018 owning AA through Single-B, broadly speaking, has had a total return of ~10%, regardless of the credit rating. Owning CCC-rated and below securities has yielded you a LOSS of ~1.5%. In this period we have seen the Fed raise rates, then reverse, and have seen investors truly "reach for yield", see negative rates.
- To tie into #1, you have performed BETTER (total return) by owning AA US corporate credit securities over Single-B rated debt since the beginning of 2018. Better performance with a significantly different risk profile. Again, this is a space where participants are "reaching for yield".
- On r/economy, I highlighted a chart I put together to help monitor turns in US corporate credit. In 2018, between January and October, a blow-off like top occurred with the highest reading ever seen, since data was available dating back to 1997. This marked the peak, and ever since has fallen precipitously to levels seen during the following periods: Q4 2015, September 2008, and August 2000.
It's a simple assumption, but given history, I suspect in or around Q1 2020 will be a bit of a "pain point" for low(er) grade US credit: Single-B and BB-rated. Likely spreads are to really get good traction to the upside. It's my estimation that the easing in credit, regardless of the Fed, has peaked around the end of September of this year, 2019.
How this impacts equities, if at all, I have no clue, but I believe the cost of protection for equities, i.e. volatility, is EXPENSIVE (yes, expensive) when compared to the cost of protection against US credit, specifically spec grade, using HYG as a proxy. And for the record, I believe the cost of protection for equities (proxy, VIX) is "too cheap". Lastly, since I used HYG as a proxy, one may note that the largest sector exposure is communications at ~25%. Second and third are both Consumer sectors (non-cyclical and cyclical), making up some 30% of the holdings combined. Worth noting on where to watch.
Edit: chart (from 1 month ago) for #3 https://i.redd.it/fwaakq2ljbs31.jpg
Submitted November 22, 2019 at 09:59PM by NegativeTangibleBook https://ift.tt/37wXSaU
