US Credit Risk Appetite Signals a 'Sell'?
Demand for corporate high-yield debt is rolling over while stocks continue to rise, a divergence that may signal a fading appetite for risk.
So far in 2013, the divergence is even more pronounced, with the HYG recently turning negative while the SPY remains up about 6 percent.
Investors often track high-yield bonds in an effort to gauge risk appetite and predict any potential turns in market sentiment.
Thus, could the recent divergence between high-yield corporate bonds and equities signal cautiousness ahead?
The 30-day rolling correlation between the HYG and SPY recently crossed below -0.25, the lowest level since August 2008. There has been only five other instances that this happened since 2007. And in four of those times, the SPY was down within a month.
In August 2008, for example, after the correlation recorded -0.28 for the first time in a year, the SPY sold-off nearly 7 percent within a month. During another instance in July 2007, the SPY fell more than 3 percent after the correlation recorded less than -0.25.
Some people may see it as a buying opportunity. "I think what this data is telling you is that the rise in Treasury spreads and disconnect in performance with high yield is that investors are buying into a recovery scenario in the U.S.," said Joel Levington, managing director of corporate credit research at Brookfield Investment Management.
"That is consistent with virtually all companies we track, which are looking for accelerating growth starting in 2Q and especially in the second half of 2013."