Asif Mohamedali’s History of High Yield

Buybacks, dividends, and M&A all depend on firms’ abilities to borrow cheap. With leverage ratios rising (and micro fundamentals weakening), macro fundamentals deteriorating, and the visible hand of the Fed now lifting off the repressed neck of risk managers, there is a simple question to answer - What Happens Next? Simply put, stocks cannot rally in a world of surging debt finance costs.

This is by far the most key point in my humble opinion as a high yield market practitioner: there is no rotation that drives high-yield credit spreads wider without punishing equities. They are liabilities on the same side of the capital structure and rise and fall in a highly correlated manner as the underlying business risk rises and falls. One cannot see high yield credit weakness as a sign of rotation to stocks - if the credit cycle has turned, it is highly likely then that stocks are set to fall. And bear in mind that while high yield  are at market lows, spreads are not at all time tights and in fact being short stocks relative to credit makes more sense if you are you are a bear on the credit cycle here. The only problem one can see is that the epic flows that sustained a credit market at non-economic levels for so long will exit in a hurry.