In January and early February, the recession trade was on. U.S. economic data for Q4 was beginning to stream in and it was not pretty. Japan reported negative GDP (-1.4% initially, since revised to -1.1%) and the BOJ instituted negative interest rate policy. The data out of China was not good and continues to slip. Europe is well, Europe; a dead man walking in the global economy.

On all this bad news, market participants began to put on shorts in everything from commodities to junk debt to growth stocks. This move by institutional speculators pushed asset prices and indices to levels which have, in the past, indicated recessionary conditions. This prompted individual investors and some retail market participants to react to what the charts were saying and began to panic. It appears that little attention was paid to underlying economic and business conditions.

Beginning February 11^th, when several OPEC and Non-OPEC members agreed (in principal) to production freezes the institutional short-sellers said: Enough!” The short-covering rally commenced. Once indices reached certain levels, investors and even some strategists believed that a sustainable recovery was in place. They, for the most part, ignored the possibility that the rebound in high yield debt, commodities and some areas of the equity markets were due mainly to short covering. Instead, retail money poured into high-risk assets. As usual, when retail plunged into risk assets, they plunged in after prices ran up a bit, This is supported by data, last week,from the high yield market that retail cash pouring into junk debt at a record pace.

Credit spreads of BB (H0A1) and CCC & lower (H0A3) vs. UST benchmarks (Source BAML):

For the past two weeks, I have been vocal that I am not a believer in the high yield debt rally. This is not to say that there are not good values to be found (based on suitability) in the high yield debt market. However, I am not a believer that junk debt is out of danger. This is because nothing has changed.