Bond

Update: The SEC Folds - SEC PERMITS TEMPORARY SUSPENSION OF THIRD AVENUE REDEMPTIONS, WILL BE SUBJECT TO ONGOING SEC OVERSIGHT

HYG, the now infamous high-yield bond ETF, had an "ok" day, rallying along with everything else post-Fed. However, shortly after the close, it started to fade quickly as SEC "expressed concerns" about Third Avenue's plan for liquidation.

China did everything it could to prevent a collapse and it still happened.  How do you think other countries will do?

While The Fed is confidently rising rates, the market is signalling its belief that this is a policy error. Not only are longer-dated bond yields lower but short-term money-market expectations for January now see a higher chance of a rate-cut, than a rate-hike.

"When the Fed moves next will depend importantly on how inflation evolves. The Fed’s preferred measure of inflation has run below its 2% objective for more than three years. The central bank focused extra attention on the inflation outlook in its statement, saying it would “carefully monitor” actual and expected progress toward the goal. This point implied the Fed will be reluctant to raise rates again unless it sees inflation actually moving up. For now, officials said they were “reasonably confident” inflation would rise."

Summing up the anxiety ahead of today's Fed decision - which talking heads just this morning explained is "priced in" and is a "non-event... been so telegraphed" - market professionals believe "it seems a good time just to go and beat the crap out of a punchbag." As Bloomberg reports, real traders say they "just don't want to do any damage today," as they trade around the events, "I think we're going to see a lot of volatility," and Treasury risk is already spiking to 5-month highs.

• Fed Poised to Mark the End of an Era (Hilsenrath)
• Fed opens meeting to put an end to crisis era policy (Reuters)
• Fed's Historic Liftoff and Everything After: Decision Day Guide (BBG)
• Emerging Markets Gird for Fed Rate Increase (WSJ)
• What 7 Years at Zero Rates Have Looked Like (BBG)
• 5 Things to Watch at the Fed Meeting (WSJ)

"If the year finishes with our portfolio holdings at or around current values, 2015 will be the worst performance year in Pershing Square’s history, even worse than 2008 during the financial crisis when the funds declined by 12% to 13%. You might therefore find it surprising that we believe that 2015 has been a good year for our portfolio companies. How can this be?"

The day has come when the boxed-in Fed has no choice: with the vast majority of the market expecting a rate hike, Yellen has to deliver or suffer a crushing confidence blow like no other. And deliver she will, with expectations that said hike will be "as dovish as possible." For now however, the market is desperate to convince itself that just as more easing and more QE were bullish for the market, so rate hikes are just as bullish. Recall from late 2013: "tapering is not tightening," then the 2015 version of this refrain is "tightening is not tightening."

With economic growth currently running at THE LOWEST average growth rate in American history, the time frame between the first rate and next recession will not be long. For investors, there is little “reward” in the current environment for taking on excess exposure to risk assets. The deteriorating junk bond market, declining profitability and weak economic underpinnings suggest that the clock has already begun ticking. The only question is how much time is left.

We’ve already gotten a taste of what happens when asset classes finally “adjust” to underlying “demand” with the commodity markets: having operated based on Central Bank money printing for five years, they then wiped out ALL of those gains in six months.

Money Week editor John Stepek has looked at the recent mutual fund collapse in the junk bond market and correctly warns that it is a canary in the coal mine.

Earlier today Jefferies reported another quarter in which its Fixed Income revenue could best be described as dismal: Fixed Income posted a nominal $8.4 million in revenue: a whopping 83% collapse from the already subdued $48.6 million a year ago.  The biggest irony is that while other banks are clamoring to be allowed to "prop trade" again, Jefferies which has had the green light to do just that as it never got an FDIC bailout and remains the only sizable pure-play investment bank, just got crushed precisely due to its junk bond prop trading.