Record High Yield inflows…it’s all Greek…and Italy to us

Given the massive relief rally in equity markets yesterday we thought it would be helpful to provide investors an update on credit markets.

This week saw an all-time record inflow into US High Yield mutual funds at $4.7 billion. To put that into a Canadian context, this inflow would represent 17% of the Total Canadian High Yield market.

Certainly this inflow into High Yield was encouraged by the equity market return over the last month. The S&P 500 is up 13.5% month to date, the biggest rally since another October … in 1974!

Notwithstanding this month’s remarkable achievement the graphs below highlight the need to be cautious.

Particularly worrisome is the 1st chart which highlights yields on Italian 10 year bonds over the last 5 years.

You’ll notice that yields today on Italian bonds far exceed the level reached in 2008. While the yield fell dramatically yesterday in reaction to the EU agreement the 2nd chart shows the sharp reversal today back to a very worrisome level.

The 3rd chart highlights the EURIBOR-OIS spread over the last 5 years. This gauge measures European banks reluctance to lend to one another. The higher the level indicates that banks are less confident to lend to one another. The level is nowhere close to where it was in 2008. However, it has remained elevated since August and did not drop after yesterday’s announcement out of the EU.

A cautious tone in credit markets despite the euphoric equity market response to recent developments out of the EU.

Matt Shandro
28th October 2011