That is the question BofA's Hans Mikkelsen tries to answer looking at last week's Z.1 statement. It is well known by now that the biggest beneficiary of the persistent equity outflows have been inflows into corporate bonds, primarily of the Investment Grade variety, as investors continue to distrust the equity markets. Yet to its surprise, BofA finds that the biggest source of capital for corporate and foreign bonds was not the household sector, but rather commercial banks, and specifically foreign banking offices. As to the "household" sector, which is the key place where retail is traditionally hidden, due to its status as a placeholder plug: it was the biggest seller of corporate bonds selling an annualized $541 billion of paper in Q3. How this number makes any sense in light of all the other data we have been getting recently is yet to be explained. Yet was is even more surprising is that corporate stocks, which ended Q3 about 10% higher than at the start of the quarter, saw net sales of over $80 billion annualized... How that led to an increase in prevailing prices is a riddle, wrapped in mystery, contained inside the Fed's ES/SPY purchasing JV with Citadel.
More from BofA:
Commercial banks emerged as the biggest (by far) net purchaser of US corporate and foreign bonds in Q3, according to Fed Flow of Funds data. Within commercial banks, foreign banking offices in the US accounted for the bulk of purchases ($440bn annualized, or roughly $110bn during Q3) while bank holding companies purchased the rest. We doubt that foreign banks were this active in corporate bonds and conjecture that a good portion of these purchases took place in foreign assets such as (non-US) US$ sovereign and supranationals (these are included in the category “corporate and foreign bonds”), where net issuance spiked in September. Mutual funds and life insurance companies continued to accumulate significant amounts of corporate and foreign bonds while Households, funding corporations and money market funds were the biggest sellers. Life insurance companies stepped up their purchases of corporate and foreign bonds significantly in Q3 while reducing their purchases of equities. Mutual funds significantly increased their purchases of all debt asset classes in Q3 while Pension funds continued a relatively unchanged strategy of purchasing mainly Treasuries and some corporate and foreign bonds while selling equities and agencies.
And an analysis of who bought what by type of buyer:
Life Insurance Companies:
and Pension Funds, which it appears are once again the clear "winners" in the latest Treasury rout:
And as an aside, on an annualized basis, the three above combined sold far more corporate equities than they bought. So it must have been that good old household sector buying right? Wrong - "households" sold over $200 billion corporate equities annualized in Q3. So there you have it again - everyone was selling, yet equities magically levitated up starting with Bernanke's Woods Hole speech. So aside from the fact that even the government admits there was a global net selling in stocks (just over $20 billion) in Q3, the market somehow levitated to close about 10% higher in Q3. Here's a hint: ETFs, that lovely CDO^2 product for Gen Z which creates it own lovely feedback loop dynamic, ended up buying $133 billion in equities annualized. Ergo: nothing but a momentum driven market, in which everyone took the change to dump their holdings, leaving synthetic products and HFTs as the latest bagholder.
For all this and many more hilarious equity market observations, we urge readers to take a look at pages L.213 and F.213 in the latest Z.1.