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Trading  | October 24, 2017


In August, we had reviewed a few charts showing that US high yield valuations were divorced from fundamentals, as well as to other yield products. This week, refreshing those charts, we can see that things are just as bad.

The top-left chart shows that US high yield spreads are diverging from the tightening of bank lending standards relative to credit demand.


Such divergences of high yield spreads and the Fed’s Bank Loan Officer Survey are rare historically, with the last time being in 2006-2007.


The top-right chart shows that trends in corporate cashflow to debt ratios also tend to lead credit spreads.


Whenever cashflows fall relative to the total stock of outstanding debt, it shows that the ability to repay debt is deteriorating for US corporates, which usually leads to wider credit spreads. Again there is a big divergence here at present.


The bottom two charts compare US high yield level to prime bank lending and EM sovereign debt and shows that even relative to other yield products, US high yield looks too expensive.

Simply put, US high yield seems to be the most vulnerable asset class to a risk-off event.

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