It is safe to say that one of the most popular, and important, charts of 2017, was the one showing the ongoing and projected decline across central bank assets, which from a record expansion of over $2 trillion in early 2017 is expected to turn negative by mid 2019. This is shown on both a 3- and 12-month rolling basis courtesy of these recent charts from Citi.

The reason the above charts are key, is because as Citi’s Matt King, DB’s Jim Reid, BofA’s Barnaby Martin and countless other Wall Street commentators have pointed out, historically asset performance has correlated strongly with the change in central bank balance sheets, especially on the way up.

As a result, the big question in 2017 (and 2018) is whether risk assets would exhibit the same correlation on the way down as well, i.e. drop.

We can now say that for credit the answer appears to be yes, because as the following chart shows, the ongoing decline in CB assets is starting to have an adverse impact on investment grade spreads which have been pushing wider in recent days, in large part due to the sharp moves in government bonds underline the credit spread.

And, what is more important, is that investors appear to have noticed the repricing across credit. This is visible in two places: on one hand while inflows into broader credit have remained generally strong, there has been a surprisingly sharp and persistent outflow from US high yield funds in recent weeks. These outflows from junk bond funds have occurred against a backdrop of rising UST yields, which recently hit 2.67%, the highest since 2014, another key risk factor to credit investors.

But while similar acute outflows have yet to be observed across the rest of the credit space, and especially among investment grade bonds, JPM points out that the continued outflows from HY and some early signs of waning interest in HG bonds in the ETF space in the US has also been accompanied by sharp increases in short interest ratios in LQD (Figure 13), the largest US investment grade bond ETF…