Equities defied the recent turmoil on Wednesday, with the S&P 500 rising 0.9 percent as of 1:50 p.m. in New York.
‘Overdone’
U.S. junk bonds are now finally coming back to earth after risk premiums relative to their high-grade counterparts hit levels that recall the pre-crisis bubble and the peak in 1997. That’s another hint recent moves reflect the credit market playing catch-up -- rather than paving a bearish course for other risk assets.
The recent sell-off looks momentum-driven, rather than real-money investors placing bearish wagers with conviction. Macro traders who failed to get aboard the bearish bandwagon in time are likely selling corporate bonds this time around for fear of missing out, according to Tchir.
“I think momentum in all areas -- be it in credit, on the equity side -- has been the dominating trade,” Christian Hille of DWS Investment told Bloomberg TV. “We don’t see a recession, we see positive developments on the macro-economic side. This is to a certain extent overdone.”
Investor Angst
Barclays Plc also reckon risk premiums are widening in sympathy with stock volatility and a slew of local drivers, including the oil-price correction, the free-fall in General Electric Co. and drama over Brexit.
“We do not think they indicate a broad increase in contagion risk and rather view the events of the past month more as idiosyncratic risks that happen to be flaring up at the same time,” strategists Bradley Rogoff and Shobhit Guptawrote wrote in a recent note.
Another sign equity markets are driving fears about corporate balance sheets: Stock-investor angst that companies are saddled with excess leverage has risen to a post-crisis record in tandem with ballooning debt burdens, according to this month’s Bank of America Corp. survey of global fund managers with a combined $513 billion.
The equity market worries over corporate leverage may be a blessing in disguise for debt investors, if treasurers use excess cash flows to beef up balance sheets at the expense of dividends and buybacks.