It's the #CreditCycle.
Despite the recent rally, we're holding the line on our short Junk Bonds (JNK) call. Here's analysis and a chart via our Macro team from a note sent to subscribers earlier this morning:
"Junk bonds have rallied +3% in the YTD, inclusive of a +6% squeeze over the past 3M alone. Option adjusted spreads continue to narrow dramatically, compressing -30bps in the past week alone to 586bps wide. This is down from a peak of 839bps on February 11th.
Is the trough of the domestic credit cycle in the rear-view mirror, leaving us holding the bag on a stale thesis? Not at all. Our work has shown that once the horse leaves the barn on the domestic credit cycle, there is no recovery until HY spreads are north of 1,000bps and corporations have sufficiently delivered their balance sheets – neither of which has occurred."
Click on the chart below to enlarge. Note: We think we're headed for a nice, big red dot (a.k.a. a blowout in high-yield credit spreads).
More on the credit cycle...
According to Standard & Poor's, there were 5 more corporate defaults this week, bringing the grand total to 51 year-to-date. FYI, that's the most since 2009.
There you have it...