The incredible rebound in credit -- U.S. high-yield corporate bonds returned 4.5 percent in January -- comes with a caveat. Short-interest in the biggest high-yield bond ETF, is near a record. Clearly, the smart-money remains cautious that the rally in risk may be temporary in nature.
“Bear rallies are normal, the market trends remain negative,” said Charlie Morris, a fund manager at Atlantic House Ltd. which manages $1 billion in assets. He reckons those who didn’t get in on this bounce early have probably missed out.
After all, the Fed’s dovishness -- Powell signaled the U.S. central bank won’t raise interest rates again until inflation accelerates -- is another signal of the maturing cycle. And while it may open the door for the risk rally to continue, gains at last month’s pace are impossible to sustain. If they were, the MSCI All Country World Index would more than double this year and Brent would hit $400 a barrel.
For the laggards to catch up, they may need to be highly leveraged or jump down the credit and duration curves. That presents a conundrum, because those kinds of strategies are high-risk in a late-cycle environment.
“Most investors we talk to are still skeptical about this rebound because it’s been so quick and sudden,” said Roland Kaloyan, the head of European equity strategy at Societe Generale. “What’s changed is that there are no more rate hikes priced in. The market has relaxed. The market wants growth but without rate hikes, and that’s not possible for long.”
This article provided by Bloomberg News.