2. Correlation between yields and junk has turned negative from this week, pointing to a bigger selloff ahead
It is about to become a challenging market for risky assets. While junk bonds have benefited from a strong risk appetite since the beginning of the year, we may be about to see the tide turning. This week indeed had seen the correlation between Treasury yields and Junk bond returns turning negative, exactly as it happened during the 2013 Taper Tantrum when yields were rising, pointing to the fact that it may just be starting to get uncomfortable for risky assets. To learn more about this click here.
Reasons why the European Central Bank should step in:
1. The periphery is just about to get into troubles
The ECB's monetary policies were doing well until the reflation trade in US Treasuries provoked a spike in European yields. Although many European sovereigns yields are still trading at historic low levels, one cannot ignore other important signals. Yesterday's Italy 5 year BTP auction was exceptionally weak, registering the lowest bid-to-cover ratio since June. At the same time, Greeks government bonds fell by more than 3% in just a month. This is about to bring back reminisces from the periphery crisis, which cannot happen while there is no clear path to recovery, and the economy lacks fiscal stimulus.