In a seminal cinematic moment, Mr. Miyagi of the “Karate Kid” instilled the building blocks of defense to his pupil Daniel LaRusso with the “wax on, wax off” movement. With the latest volatility roiling the capital markets, it appears fixed-income investors are assuming their own defensive stance with “risk on, risk off.”
As the capital markets were in the thick of the extended bull run that peaked in the summer prior to the October sell-offs, high-yield assets saw an influx of investor capital, beating out their higher-rated rivals in investment-grade corporate bonds and other investment vehicles that emphasized safety. After investors got washed through the October volatility cycle, that may have tamped down their risk-on sentiment and short-term debt is where investors are now flocking to after high yield fell out of favor.
As corporate earnings for much of 2018 were largely positive, it made servicing debt, investment-grade in particular, easy. With investors hungry for risk, the yields in investment-grade corporate bonds weren’t enough to satiate that appetite–risk on.
After the downpour of volatility in October, investors may now be ready to seek refuge under the umbrella of investment-grade corporate bonds again. As a result, high yield has underperformed lately as investors flocked to the safer confines of debt issues that are investment grade or more notably, shorty duration–risk off.