(Bloomberg) -- Warning signals are starting to flash in the credit markets, according to Cantor Fitzgerald LP.

Equity implied volatility remains extremely rich compared with credit spreads, Cantor Global Chief Market Strategist Peter Cecchini wrote in a note Sept. 12. It’s possible that stock-price swings could revert to tight spreads but unlikely, given a lack of positive catalysts, he said.

“The flow dynamic that is pushing investors into high-yield and low-investment grade is strong,” Cecchini wrote. “However, we are starting to see signs of pure froth.”

Cecchini remains Wall Street’s biggest equity bear, with a year-end estimate for the S&P 500 of 2,500. That implies about a 17% drop from the index’s close Sept. 12. He continues to recommend getting into protective hedges ahead of a likely Federal Reserve rate cut and the beginning of the U.S. earnings season next month.

The global stockpile of negative-yielding debt recently surpassed $17 trillion, causing firms such as Axa Investment Managers to surmise that investors may be taking on riskier debt than they might otherwise, hoping for better returns.

Cecchini said he’s watching increased leverage levels and reduced coverage among leveraged issuers.

“Based on flows we see, there has been little follow-on buying on this round of recent new high-yield issues, and many deals have been priced to perfection,” Cecchini wrote. “It’s unclear what the catalyst for a severe sell-off might be, but we don’t expect more spread compression.”

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, ;Andrew Monahan at amonahan@bloomberg.net, Ken McCallum, Ravil Shirodkar

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