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US High Yield Technicals Rebalance

13 March 2017 by Mark Holman

Last week we saw a sizeable rebalancing in the technical picture for US high yield resulting in a pull-back for returns, with the sector giving up 1.22% on the week and bringing the year to date gains back down-to-earth to a more reasonable 1.74%.

The cause was quite simply a sharp reversal in the technical picture, as the market had to digest the heaviest week of new supply ever in the US high yield sector, with over $17bn of new issues being printed. This was coupled with heavy mutual funds outflows of around $3bn, which equates to around 40% of the new money that came into the sector since the US elections. The cause of the latter is most likely a healthy dose of profit taking from a sector which is now up a staggering 26%, since the lows in February 2016. The trigger being a combination of the Fed stepping up their rate hiking programme and a week of sharply declining oil prices, which were at the core of the sell-off in Q4 2015 and early 2016.

So the real question is whether this becomes a new trend? Naturally time will tell and we cannot trade with hindsight, however our view is that this is a small healthy correction. Fundamentals in credit remain solid and the economic outlook is improving, hence the need for the Fed to hike rates this week. We have been running a healthy balance of cash and near cash positions, and at this stage do not feel compelled to deploy them given the small correction; but should last week’s move extend further we would be tempted to start putting money to work in our favoured sectors.

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