Jeff Cox — How the Fed screwed up the bond market

"Perhaps the biggest issue we have with high yield is that the asset class' performance has been driven over the last several years not by fundamental strength, but by QE and a lack of global yield," BofAML credit strategist Michael Contopoulos and others said in a note to clients. "In fact, the picture painted of the U.S. economy and of high-yield in particular is pretty bleak." 

Contopoulos points to other worries in high-yield, such as lackluster corporate earnings in the space and an unwillingness to invest in capital, instead pumping money into stock buybacks and dividends. His language is strong, calling trends "very worrying" and pointing to "worsening fundamentals."

Translation: "Investors" bought a pile of junk because of low rates and a search for yield in spite of fundamentals, driving prices "higher than they would be otherwise." The Fed admitted that this was purposeful to create a wealth effect that would spur more consumption. Now that the prospect of rising rates is looming, holders of the pile of junk are looking for the door. Classic example of everyone running to one side of the ship and then turning and running to the other, capsizing it.
CNBC NetNet
How the Fed screwed up the bond market

Jeff Cox