The Return of Risk Aversion and the Market's Next Move
Market internals remain bearish. The rush to cut portfolio risk remains intact. Here is a two-year chart of the S&P 500 (in red) and the iShares High-Yield Corporate Bond ETF (HYG):
Both lines in the chart reflect investors’ risk appetite. Over the past year, retail investors have been piling into corporate bond funds. This inflow helped push bond prices up and yields down, allowing heavily indebted companies to refinance bank debt with proceeds from corporate bond offerings.
Lots of credit risk has shifted from the banking system to the bond market, where we have transparent, tick-by-tick pricing of credit (as opposed to “mark-to-myth” accounting of bank loans).
The return of risk aversion will drive many investors toward higher-quality bonds (away from “junkier” funds like HYG with higher yields and higher credit risk). This isn’t good for leveraged companies that rely on access to easy financing in the bond market.