The High Yield Bond ‘Emperor’ Has No Clothes, BofA Warns 1 In 3 Firms Face Default Threat
- The High Yield Bond ‘Emperor’ Has No Clothes, BofA Warns 1 In 3 Firms Face Default Threat
by Tyler Durden, www.zerohedge.com
The market reaction from last week’s dovish FOMC statement took many by surprise, including BofAML’s HY Strategy team, but as they say the High-Yield Emperor has no clothes, warning that the underlying commentary provided by Chair Yellen shows the vulnerability for high yield issuers to longer-term growth trends. Couple the deteriorating fundamentals for HY issuers with downgrades outpacing upgrades by a ratio of 3.5:1 and a worsening of global growth potential, and they believe the recent rally, though boosted by strong inflows and cash generation, will ultimately fade.
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Bad news is bad news, until it’s suddenly good
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The market reaction from last week’s dovish FOMC statement took us by surprise. Due to risks stemming from global economic and financial developments, Chair Yellen kept the target range for the federal funds rate unchanged at ¼ to ½ percent. And although this outcome was largely expected by markets, the Fed also cited global growth concerns and subsequently reduced their growth and inflation forecasts for this year and next. Under normal conditions, the mentioning of global growth concerns by the Fed has been met with a market selloff as a negative economic outlook brings concerns of lower corporate earnings. In fact, the last two times the Fed indicated global risks to the domestic economy, while holding rates steady, high yield declined 4.5% and 4% over the next 13 days (Chart 1).
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