HALISTER1: BofAML Sees Bid for Risk Causing Beta Compression in High Yield

BofAML Sees Bid for Risk Causing Beta Compression in High Yield

(Bloomberg) -- With positive sentiment extending across markets, bid for risk could continue for the next several months, causing indiscriminate beta compression in high yield akin to 2014, BofAML high yield strategists led by Michael Contopoulos write in note.
  • Recommends positioning within lower quality, where there is less rate risk and better carry
  • Expect BBs and single-Bs to incur a greater percentage of losses for every basis point move higher on the curve, if the Fed continues with the hiking cycle
    • Negative convexity for higher quality high yield is because 50% of BB and single-B bonds currently trade to call and 83% of trades below coupon, putting a cap on price appreciation
  • Strong 1H17 showing could be followed by a lackluster 2H17 amid concerns that markets would have run too far; should the expected tax reform and infrastructure plan fail to materialize, there could be a selloff in the high yield market
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Michael Contopoulos (Bank of America Corp)

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