No Dry Spell
For most of the fourth quarter, demand for options that benefited from a 5% retreat in the S&P 500 relative to a 2.5% in the junk-bond product was even more extreme than it is now, a dynamic which may pose a risk to bets on a reversion in volatility between the two asset classes.
The high-yield primary market isn’t looking anything like it did in December, which was the first month without a deal pricing since November 2008. This has been the busiest week since September 2017, with around around $12 billion in issuance. While companies may be worried that a window is closing, new issues have remained oversubscribed with mixed results on pricing.
This isn’t the first time China-linked scares have helped narrow the spread between high-yield debt and equity relative volatility. Downside in the junk bond fund was relatively bid compared with S&P 500 puts during the fourth quarter of 2015 and first quarter of 2016. Back then, there where lingering fears of a hard landing in China following the shock devaluation of its currency, soft oil prices, and the initiation of the Federal Reserve’s tightening cycle combined to roil markets.
Vinay Viswanathan, a derivatives strategist at Macro Risk Advisors, made one of the first bearish calls on HYG Wednesday, writing that “the potential impact to the credit market from concrete tariffs on Chinese imports announced this Friday’’ made short-dated puts attractive.
This article was provided by Bloomberg News.