Well, we’ve reached that listless holiday nadir when even Bloomberg has run out of shit to talk about and so you get the exceedingly rare “paid programming” on BBG TV. Right now, it’s a fun TIME Life add for a “Golden Oldies” album.
I’ve got a longer piece coming out elsewhere later today (hopefully) on this subject so I won’t get too deep in the weeds with it here, but in light of the post we ran here earlier on the extent to which, as Deutsche Bank puts it, “the next nexus of risk is the credit space,” I wanted to draw your attention to a pretty incredible chart from BofAML.
As noted in the piece linked above, outflows from corporate credit ETFs, and particularly from HY vehicles, have the potential to feed back into the source where the source is a VIX spike. You can read the excerpts yourself, but the gist of it is as follows according to Deutsche’s models:
For HY, Deutsche goes to note that there’s probably a self-feeding loop built in. Here’s how they put it in the context of the current environment where, again according to their models, credit hasn’t yet “caught up” to the VIX spike: “Should credit sell-off to where the current level of volatility implies, liquidity would likely deteriorate anyway, and the added pressure from fund outflows would likely further exacerbate the spread widening.”
I think it’s entirely fair to suggest that in the event that were to happen, the spread widening (i.e. the high yield selloff) would become a directional driver of risk appetite and thereby feed back into the VIX. So, something like this maybe:
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