Bank of America:
Year-to-date, BofAML’s Baraby Martin notes that the market narrative has swung wildly. “US recession…”, “global recession…”, “China devaluation…”, “commodity bust…” and “energy defaults…” have all been blamed as the major drivers of risk assets thus far in ‘16. The bearish concoction has left markets way down from their January levels. In credit, investment-grade spreads widened 16bp last month, and high-yield 36bp – the worst start to the year since 2008.
Over the last week, though, the “central banks to the rescue” narrative has also resurfaced. Not only has the BoJ embraced NIRP policies for the first time, but the ECB has strongly hinted at QE3 in March, and the Fed has added a dovish tinge to its outlook. “Yield”, as a secular theme, continues to stand tall, a full 7yrs after the GFC event. While the growth of negative yielding assets is now well flagged, it’s the other side of the coin which is talked about less: namely the decline in positive yielding opportunities.
Chart 1 shows that the global stock of positive yielding fixed-income debt has shrunk from a peak of $37.6tr in mid-2014 to just $32.5tr now, despite total debt levels rising by $4tr. since.
And yet, the market’s response to the salvo of central bank action lately has been a shallow bounce. On Friday, the Nikkei’s intra-day performance was up/down/up. And in Europe, our equity team’s “low risk” dividend basket has been lagging behind the jump in negative yielding government debt lately (chart 2).
Yield “fatigue” may be overtaking yield “euphoria”.
The further central banks go down the rabbit hole of unique monetary policy, the greater the fear factor of how normality will eventually be restored. And as Michael Hartnett highlights, the risk of “quantitative failure” in markets grows.
