Guest Post: Two Clear Warning Signs In The Credit Markets

Tyler Durden's picture

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Yen Cross's picture

 Could loss of paying cash, be one of those warnings?

Number 156's picture

I thought you were going to say "No credit" as one of the problems.

Yen Cross's picture

 Credit has never been available. You I suppose, can do the math. Your time is appreciated.

buzzsaw99's picture

wow, that was a deeper look up the bung hole of the bond market than I ever expected to read.

Yen Cross's picture

  Thanks BUZZ, no offense. yen

zhandax's picture

I used to call the 'bung hole of the bond market' home and I learned a few things.  Since they didn't exist when I traded this shit, it never occurred to me how much fun could be had by jacking with the indices.

CPL's picture

Check your credit cards.  If they jacked up your credit's a good sign they are moving.  If it increases x2 QE3 is won't be announced.

High Plains Drifter's picture

chinese divest themselves of 97 percent of us treasury bills.....


hack3434's picture

If I read it right, it's just short term paper. 

So Close's picture

Do you just read the headlines?

sneering nihilist's picture

my understanding is that the most recent bonds had terms ridiculously friendly to the issuer. if that is true, then why wouldn't prices on these issues weaken?  how are more mature issues doing? if the older bonds are holding up but the recent issues(with less appealing terms for investors) are weakening i'd say that is a sign of a healthy market. i like corporate debt here and will continue buying the fucking dips in this space.

jm's picture

People know they can't unwind in an orderly way.  Fat lot of good getting flat does when you have to worry about the counterparty.  So there's a lot of cash sitting out there, not just PIMCO.

HY hits 8%, lot of money be piling in. 

chartcruzer's picture

Hmmm,,  it may be worth while to wait for some kind of actual sell signal/weakness on these instruments longer term.   So far,,,, this seems to be speculation.   Examples

Investment grade corporate currently a SOLID buy.[s233943224]&disp=P

High yield corp bonds starting to show a bit of weakness and,,,,,,,  just flat for now[s232907077]&disp=P


jm's picture

Market strucure issues are what concern me.  If you ask a dealer to make a market for you, and they won't, you can be bidless in a heartbeat.

Not sure where the author stands with fair value, but this a great article.

BTW, I loved the long-term chart you posted about the long bond a couple days ago.

AUD's picture

So speculators are seeing potential profits in something other than corporates? Possibly in Treasuries?

Capital Context made an interesting point the other day. Speculators have been buying Treasuries further out in duration. The Fed & the BoJ & the BoE have all but given as much profit at the short end as they can, with overnight rates at zero but there is still risk free profit, the best profit of all, further out. Central banks can be goaded into 'coming up with the goods', all it needs is some credit spreading.

slewie the pi-rat's picture

from p. tchir: The salespeople are trying to find out what happened to all the clients who swore up and down they would buy any dip or that they were keeping powder dry for just such a moment. 

Right now there are few corporate bond buyers, but there are not many sellers so we can stay in this limbo of a liquid but weak CDX index market and an illiquid but seemingly firm cash bond market. (End Paste)

on 5.20.11, bloomberg reported the busiest week on record @ $54 Bil for hi-grade stuff.  and the next week,  "investment-grade issuers included Hewlett-Packard $5.0bn, Caterpillar $4.5bn, Barrick $4.0bn,"  [from doug noland]. 

so, i think the well is dry or the mule is tired, or something. 

credit needs exceed credit available?  roll the presses!

the people who never noticed the credit & price bubble in housing are now making loans to nations which are not credit worthy.  the people are rioting to tell them they are not credit worthy!  but, the banksters can work everything out, see, just sign here.

we are not worthy! 

Yen Cross's picture

S you are smar, However, have you ever seen the planet  earth


  My Thread was edited! I'm telling the truth.   Yen

slewie the pi-rat's picture

hey, Y/C!  i may have seen the earth from a lower orbit...

i've been hanging out w/ an old kingfisher and a few herons.  they are food chain capitalists, along a little creek.  so far, they have had a pretty good Spring.

Yen Cross's picture

 Slewie King Fishers are always well grounded. I was thinking Blue Fin! You my friend seem concerned. Hit me @ Best wishes.


      Yen Cross

RoRoTrader's picture

tricky shit isn't it........figuring out the psychology of macro policy space and at the same time trying to be fluent in the micro space where all of the micros are trying to interpret price action.

quite the game if you ask me.........i think we should keep it churning along for what that is worth.......or not.

ps slewie,,,,,,,,,where do you think the money will run as it trys to hide until you can run but you can't hide sort of thing?

Luke 21's picture

Great Post. Thanks.

Fiat2Zero's picture

I'm admittedly a newbie in this area, so the fine points escape me. To paraphrase it sounds like the author thinks the commercial credit market is deteriorating (well one step before). Wasn't this what made Bernanke freak out and start QE (I.e. Total freeze of credit market)? Is the obvious conclusion that we may be seeing a repeat of 2008, in a "History never repeats but it often rhymes" kind of way?

in4mayshun's picture

Many factors caused the 2008 meltdown, but lack of liquidity is what triggered it, which in turn led to collapsing credit markets. But thats a vast over-simplification.

treemagnet's picture

I think I've lost that loving feeling........

vxpatel's picture

Anyone else spot news of this?

China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.

Reese Bobby's picture

Decent post.  The MBS/CMBS market is the canary in the coal mind.  Most banks and credit funds own mortgage securities using 3-4X leverage.  ABX is even quoted on unlevered and levered yields.  Any unwinding of mortgage market leverage will have a big effect on all credit markets.


I think your corporate bond observations are flawed unless you are talking IG only, and even then I am surprised given the strong rally in UST's.  But the end of this week was enough of a sell-off to notice.  We all know what happens eventually: Boom!  But I have grown accustomed to expecting all weakness to be temporary,  although I don't invest that way.

dcb's picture

so I'd like some feedback from folks.

the last market peak I looked at treasuries and compared the price to where they were whn oil was 147, and decided they looked good considering the state of the economy. I did the same at this peak. on a bit of a  historical note you look att he tlt chart and it gives nice entry points for near market peaks and corrections, bottoms as well as tops.


I write about this on these pages, wondering about the market action going up and treasuries going up as well. the dichotomy. Nobody answers. so I have now used it twice as a market timer rather well. Does anyone do this?

in a  normal interest rate environment treasuries hear would be a buy stock signal. I know it isn't know because things are so screwed up with QE and all.

now, my target exit point for treasuries just go hit, 97 on tlt. any thoughts from anyone, anyone at all?

decon's picture

I'm certainly not steeped in the bond world but pay attention to TA even though I suspect all the intervention messes it up, but if you look at TBT a massive IHS has formed with the head formed in 9/10.  The rS should form soon with yields dropping to about 4.  That would fit with a lack of Q3 deflationary pause and then the money spigot again.

dcb's picture

I have been floowing tbt because my trading strategy is to trade a few things I can trade up and down. I don't see that formation, I see a HS formation with top 2/11, two shoulders and going down through the neck line.

The Answer Is 42's picture

I'll throw in my $0.02.

TLT is strongly negatively correlated to stocks. But I'm not sure which is leading which, or rather I'm not sure either is leading. What I think is more intriguing is when both treasuires and stocks move in the same direction. When they both go up, it's either a macro risk-on trade -- possibly an indication of some sort of bubble. When they both go down, it's a macro risk-off trade.

For the last few days, both came down.

dcb's picture

no if you chart the channel on tbt, that pop was exactly as expected, with the recent low/high exactly on the channel bottom for tlt. the screwed up thing, and thing that really shows the manipulation by algo's in that market now was the action friday. where futures were so bad, but the algo's brought it up anyway exactlly to the bottom of the tlt trend channel. Top of tbt trend channel.


But this fits with my theory that where the market goes has really been programmed beforehand. I make much more money trading if I chart the trend lines out, put my buy and sell orders into the computer before, and ignore the markets. or any data.


the other things I notice is that the also's always try to keep in downward channel, or in the us case speedlines. I think when humans get into the mix a real lot those lines are violated and the quants can't manipulate with the added volume

The Answer Is 42's picture

Great analysis, thanks!

I'm confused about a couple of points, tho. Any enlightenment is appreciated.

1. If the dealers are loaded up with cash bonds, wouldn't the hedge be BUYING CDS? They could buy single names to be more "precise" or they could buy indices if they hold many names and want to go the shotgun approach. But I can't find any rantionale for them to short indices.

2. When an index is rich to sum of single names (and refuses to be arbed away for some time), it implies hightened correlation risk, in other words fear of a systemic event. But when indices are presistentlhy cheap, the only fundamental (as opposed to temporary, technical/idiosyncratic factors) factor would be hightened counterparty risk on index sellers, more so than single-name sellers. Why would this be, I don't quite know. Why inddeces are cheap is still a mystery IMHO.

Many corporates took advantage of the QE2 good times in the past few months to grab cash. The rush may be coming to an end with the uncertainty after June. Fundamentally, I think everyone is holding their breath for this month, or at least trying to so far. If there're promises of QE3, in whatever form, all mkts will sigh a big sigh of relief and shoot straight up, except USD of course. So, no, I don't believe the mkts are in any grave danger of crash in the short term. It's range-bound by definition: if things are good, then no QE3 and mkts go down; if things are terrible, then QE3 and mkts go up.

The real crash will come much later, when it becomes obvious to the mkts that Fed printing can no longer perpetuate the game -- the usual suspects: commodities inflation, dollar devaluation, abandonment of dollar reserve status.

jm's picture

Hope this helps.

1.  Single name CDS is dominated by dealers, could be prop and not just inventory hedging, so in general hedge funds buy and sell the index for liquidity reasons.  Seems that the sovereign debt space is different because those types of bonds are different than corporates.

2.  I asked a similar question before...  HY is a "hybrid" of correlation to revenue (like stocks) moves and correlation to spread (like treasuries).  So why not hedge it with VIX call spreads? Or hedge it with CDS, etc?

LMAO at my expense ensued.  Answers:  "The basis works well until you need it"-- the CDS spread bond yield correlation breaks down when you need it.  This is far more common than people think.  "Are you a vol trader? F*ing sell it and book profits!!"

In short, they crushed my idealism that everything works as planned and every hedge can be hedged.

The Answer Is 42's picture

Thanks, but

1. yes, it's generally easier for anyone except the big IB desks to use indices than single names. But still you hedge long cash with long CDS indices, not shorting them. (With DTCC I thought it's easier for anyone to play single names now but that's beside the point.)

2. yes, the CDS-bond basis has a nasty tendency to go haywire near default. This could be due to counterparty risk or idiosyncratic crap like delivery options, supply-demand for the paper, and so forth. HY, being generally closer to default by definition, tends to have more of this basis trap. But I don't see how this is related to the index-singleName basis. The only two types of causes for this basis, as far as I can think of, are either correlation risk (index trading rich) or counerparty risk on indeces sellers. Or maybe surging demand for single names. But I don't quite understand the driver behind the latter.

There is always logic in the mkt, although it may not be what you think is logic.

jm's picture

Yes, I see.  I was reading your question wrong.

An example about this correlation driver.  As a starting point, I say that illiquidity is what screws the basis, whihc I think is fair enough, but perhaps worthy of discussion.

Let's say you hold some muni bonds you like from 10 states... tax revenues up, balanced budget law... work with me. It would be natural to hedge these long MCDX.

If you hold some munis from states that are in trouble, hedging with MCDX doesn't make sense.  The downside/upside mix doesn't work... you lose more than you gain, and it makes sense to unwind or hedge in the names instead.  But if intrinsics aren't liquid, and even a more suitable index like GO CDS, the hedge won't work well, as you said.

I use this example instead of the corp complex because the seignority mix and other things is more complicated than in munis. Just a clarifying example that may distill away pertient issues, but I see the same type of effects going on in a lot of spaces. 

Now since the Fed had been pumping liquidity, there has been strong demand for beta chasing in weaker names.  It makes more sense to unwind a weak book than to hedge in this case.  If the instinsic is strong, you will hedge it with an index for the liquidity.  Either way, single name hedging is at a disadvantage.

Reese Bobby's picture

It may be that dealers tend to be long more CDS/CDX during periods of high primary issuance like we are in now; especially if they have bridged deals.

But I think they find R2000 stock puts more liquid at this point so I am just guessing.

Maybe it is as simple as the shelter from interest rate volatility that CDS/CDX provides...yes, I'll go with that.

FreedomGuy's picture

Is this a post purely for traders or are there implications here for the general public? I find this interesting though I confess I understand less than half of it. Should I buy more gold, sell my stocks, close my mutual bond funds, load up on corporate debt, vote Republican, move to Taiwan, lol? I definitely should not seek work as a bond trader. Good luck to all of you in that profession in reading the tea leaves.

Wild tree's picture

Free, no one can read the leaves in this 1984 world we live in. Black is white, up is down, sub-prime crisis is contained, Patriot Act will make us safe, green shoots, depression is only transitory, ARGHHHH.

Methinks that we will have a deflationary event simultaneously with hyper-inflation. Cars, real estate, toys will continue to crash in value and become worse when the dollar defaults, necessities will spiral up like balloons. Cash will be king until the US defaults because of government and personal debt, then the dollar becomes toilet paper as the world moves on to the next world reserve currency. Bubbles will always be blown by the New World Order.

The puppeters will engineer many raids on PM's, and I think that they will go nuclear soon. If so, (ie gold $1,000, silver $20) back up the truck for these commodities are being actively pursued by IMF and other governments. That will also be what the criminal elements of our society (bankers/politicians) will be doing; at our expense of course.

My advice is to load up on ammunition, food, and have a dependable access to water. Secondarily, pick a place in the country with family/friend as an emergency safe haven and make sure you have an agreement in place, if you can't live there. The zombies will panic when food can’t be found on grocery shelves, will even forget to turn on the boob tube as our society crashes and burns. Katrina was a preview. This will be a world-wide event, as we all are spokes in the wheel riding the wave as it crashes down.

Thanks to all the zh's out there, that mix thought with their ruminations. This is where I come to read the leaves. Good luck to all.

bond trader's picture

It would be a warning to the general public also. If there is just a risk off scenario corporates will underperform treasuries. If there is another deflationary scare corporates can head in the opposite direction as they did during the Lehman debacle. For example, AXP 7.3 13 traded at 87 now about 112, Some Chubb (CB) 2018 maturity traded with a 50 something handle now trading around 118 I believe, and some BAC bonds traded in the 40s. All the while Treasury prices were smoking. These are not losses anyone can stomach. 

mayhem_korner's picture

Very insightful for me (a know-nothing about bond markets). 

It occurs to me though, in this era of microbursts and near-instantaneous data discovery, that time - intentional accelerated or decelerated response - is perhaps the strongest lever in spread arbitrage.  I wonder what Myron and Fischer would say about this.

ibjamming's picture

This is why the economy is so fucked up...all these fucking products, all the gambling.  Why can't it be simple?  You want buy don't want sell them.  ALL this shit is just a way to seperate someone from their money.

Reese Bobby's picture

"ALL this" is a way for dealers to bank onerous commission in return for investors getting substantial leverage on the cheap.  This is among the same bullshit that nearly imploded the financial system just 2+ years ago.  The Bank Cartel operates with impunity as they own the Fed and "our" Politicians.  And the poor average American is poorly equipped to ever understand the PROBLEM even if they were inclined to try.  The weather forecast is stormy...

ibjamming's picture

Leverage IS the problem.  WTF?  "Leverage"?  Why?  It's just fucking GREED!  It's the leverage that is killing us.  Leverage is what turned a $14 trillion deficit problem into a $100 trillion problem that we may not be able to service.