In August, we had reviewed a few charts showing that US high yield
valuations were divorced from fundamentals, as well as to other yield products. This week,
refreshing those charts, we can see that things are just as bad. US high yield seems to
be the most vulnerable asset class to a risk-off event.

The top-left chart shows that US high yield spreads are diverging from the tightening of bank
lending standards relative to credit demand. Such divergences of high yield spreads and the
Fed’s Bank Loan Officer Survey are rare historically, with the last time being in 2006-2007.
The top-right chart shows that trends in corporate cashflow to debt ratios also tend to lead
credit spreads. Whenever cashflows fall relative to the total stock of outstanding debt, it
shows that the ability to repay debt is deteriorating for US corporates, which usually leads
to wider credit spreads. Again there is a big divergence here at present. The bottom two
charts compare US high yield level to prime bank lending and EM sovereign debt and shows
that even relative to other yield products, US high yield looks too expensive.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception