A recent article in Bloomberg outlines the viewpoints of a group of strategists and investors (with supporting data graphs) regarding to what degree the current bull run may have staying power. Here are a few:
George Pearkes, of Bespoke Investment Group shares concern for the “decline in, and volatility of, spreads on securitized debt,” using the example of auto asset-backed securities today versus before the financial crisis. Before the crisis, he says, they traded in a tight range compared to Treasuries, but since that time have been “a very different animal, oscillating in a wider range and responding to changes in the fundamental and credit market environment.”
David Riley of BlueBay Asset Management points out that market correlations still “hover above the period just before the crisis, suggesting there may be some room to run in this trend should the current ‘Goldilocks period prevail.’ ” He also underscores the tightening of credit spreads on investment grade European bonds, but adds that the ECB’s continued quantitative easing may further support the rally.
Richard Briggs of CreditSights Ltd. says, “Emerging-market dollar sovereign debt may seem incredibly tight at the current juncture relative to recent history but sovereign spreads in both investment grade and high-yield debt are still wider than the lows prior to the global financial crisis.”
Jared Woodard, Bank of America Merrill Lynch says that the bank’s Bull & Bear indicator—which tracks when investor fund flows and market prices have moved to a level where the market is more likely to revert to the mean—has risen nearly to a “sell” signal level, but that they “would need to see big inflows to emerging market debt and equity, and a reversal of recent outflows from high-yield bond funds.”
Marty Young of Goldman Sachs Group points out that, while most asset class valuations are stretched, those of U.S. agency mortgage-backed securities are “less stretched.” While “normalization of the Federal Reserve’s balance sheet will put slow upward pressure on MBS spreads,” Young expects continued positive returns if volatility is “contained.”
