Against this backdrop, the average premium on junk bonds over investment grade is about a half a percentage point from the lowest level notched since 2007.
What’s more, fewer traders are paying up to short exchange-traded funds that track U.S. corporate bonds. The percentage of shares on loan to short sellers in the iShares iBoxx Investment Grade Corporate Bond ETF has this year fallen at a faster pace relative to same measure for the benchmark equity product.
While it makes sense for some shorts to be unwound in the rally, default swaps also point to robust confidence on the business cycle.
The Markit CDX North America Investment Grade Index, a gauge of contracts to insure corporate debt for five years, sits almost seven basis points below its five-year average.
Yet in equities, caution is legion.
The iShares Edge MSCI Min Vol USA ETF, ticker USMV, has seen inflows almost every day this year, attracting more than $3.5 billion in 2019. That’s a sign of investors hedging their bets by pouring cash into low-volatility strategies that offer more protection during downturns.
Deleveraging Drive
Debt markets may even want to thank Federal Reserve Chair Jerome Powell’s hawkish pronouncement in October, which fueled the fourth-quarter meltdown and led to the central bank’s subsequent dovish capitulation.
The resulting paranoia about the longevity of the bull market continues to spur equity investors to bid up names with healthier balance sheets -- giving companies an incentive to bolster their creditworthiness.
“Are we going to see more rating downgrades or are we going to see more and more companies cutting their dividends or being forced to make disposals to cut their debt -- which benefits the bond holder at the expense of the equity holder?’’ asks Sels at HSBC.