Joe Biden has declared victory in the US presidential election, meaning the biggest event of the year is behind us. Uncertainty always increases the level of risk premium that investors require to stay in the market, which causes volatility around periods that could move markets either up or down.
As the fog receded and the outlook for the next 12 months became clearer, markets reacted positively to the outcome of the election. Yet not all parts of the market responded in the same way (see figure 1).
Figure 1. Dispersion in the market
Source: ICE Bond Indices, Bloomberg, as at November 2020.
The synthetic market is outperforming cash, due to its superior liquidity, the fact that investors can easily increase risk through credit-default swaps and the clean-up in the short positions built before the election. Meanwhile, energy – and particularly the high-yield segment of the market – is performing better in response to improved growth prospects.
BB-rated securities have also done better than those rated CCC, largely because they include fallen angels (or issuers downgraded to high-yield status). The lack of a blue wave in the US also means that the stimulus package could be at the lower end of the speculated range.
High-yield credit is outperforming investment grade, while the US is ahead of Europe as markets slowly return to pre-coronavirus levels. The rest of the market largely caught up with high-yield energy on Monday and valuations are now back to where they were at the end of February. Is the market getting ahead of itself? The likely answer is yes.