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What Do High Yield Bonds Know That No One Else Does?

Tyler Durden's picture





 

Wizened old market participants are often heard mumbling into their cups of green tea that "credit anticipates, and equity confirms" and so it is once again that the credit markets - fresh from the exuberance of endless technical flows, CLOs, and PIK-Toggles - has made a rather abrupt U-Turn in recent weeks. As Barclays points out, the ratio of High-Yield bond spreads to Investment-Grade bond spreads is its highest in three years as IG has been dragged lower by QEtc's impact on MBS and rotation up the spread spectrum. Typically, this kind of push would mean high-beta credit would outperform but far from it as cash bond markets have gapped out very recently. With call constraints (thanks to ZIRP) on high-yield bonds, the extreme price dislocation (given HY's inability to rally 'enough') will likely drag IG credit out - and that is a very crowded trade. Just one more unintended consequence from the Fed.

 

HY bond spreads are pricing in considerably more pain than IG bond spreads - what do they know?

 

CDS markets are not moving as much - having short-squeezed recently and just reracking with stocks. Bonds - real money accounts - are in trouble here...if this differential remains... but it seems that the crap-end of the credit quality spectrum remains active with new issuance.

 


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Fri, 10/26/2012 - 14:22 | Link to Comment vinayjha
vinayjha's picture

When HFT and election is around. Every wrong thing is right.

http://ww.freefdawatchlist.com

Fri, 10/26/2012 - 14:40 | Link to Comment SheepDog-One
SheepDog-One's picture

Well, only a few more days of that paradigm left, and then what?

Fri, 10/26/2012 - 14:53 | Link to Comment NotApplicable
NotApplicable's picture

Mayans take the stage!

Fri, 10/26/2012 - 14:30 | Link to Comment alstry
alstry's picture

High Yield Bonds know that without a few quadrillion in CDSs.....they are worthless.

And without CDSs....the fraudulent SYSTEM fails.

when few produce what's consumed....we are all milking off the system in the http://www.udderworld.com

Yet we all want to be the BIG shots and want control....

Reminds me of the scene in Batman when Bane has his hands on the banker's shoulders and asks him if he thinks he is in control just because he has a lot of money................right before Bane snaps his neck.

Control can be an illusive thing when everyone wants it at the same time and the world is bankrupt.

For anyone that has ever played hockey....there is ZERO HEDGE in a bench clearing brawl.

Fri, 10/26/2012 - 15:54 | Link to Comment drivenZ
drivenZ's picture

"High Yield Bonds know that without a few quadrillion in CDSs.....they are worthless."

 

you have no idea what your talking about, just throwing that out there. The single name CDS market has been contracting substantially as of late. Which in itself is even mostly meaningless in the context of what you said. 

what would even be the argument with that statement? so people are only buying HY because they're hedging with CDS? no. You can hedge HY with the S&P. Most HY issuers are real businesses with real fundamentals. Maybe high leverage, maybe middle market, maybe some execution risk but none of those equals worthless. Not to mention, people need yield(see fed) so there's heavy appetite for HY paper and Loans(for those worried about rates).  

 

Fri, 10/26/2012 - 16:07 | Link to Comment eddiebe
eddiebe's picture

dow theorist, I just wonder how reliable dow theory and looking at charts is when the markets are as manipulated as they are today? Banksters can juice or short any segment they choose, and I'm mostly certain they do.

Fri, 10/26/2012 - 14:32 | Link to Comment Mercury
Mercury's picture

"credit anticipates, and equity confirms"

These days it's more like: equity trades on hope and credit trades on change.

Fri, 10/26/2012 - 15:02 | Link to Comment kaiserhoff
kaiserhoff's picture

so sad, so true.

Fri, 10/26/2012 - 14:33 | Link to Comment walküre
walküre's picture

Now that it's established Kevin Henry (sr. trading/analyst FRBNY) is monitoring and possibly reading ZH, we can hope that he will learn a few things that his masters haven't shared with him.

Keving, are you there?|

Do you want to play a game?

Fri, 10/26/2012 - 14:37 | Link to Comment Thecomingcollapse
Thecomingcollapse's picture

This is Kevin, No time to talk!! We must close green today, Bernanke said I had to make it happen.  To busy pushing buy button.... must close GREEN

Fri, 10/26/2012 - 14:45 | Link to Comment walküre
walküre's picture

Kevin, do you really want to make a name for yourself or remain the average kid on the trading block?

Buy 100,000 GC for Feb 2013 and let's get things started....

You might be dead tomorrow or you might be President one day. Either way, you will have eternalized your name.

Fri, 10/26/2012 - 15:54 | Link to Comment Thecomingcollapse
Thecomingcollapse's picture

You see what I did!!! It's Green Close!! Yes, I did it!

Fri, 10/26/2012 - 14:37 | Link to Comment 101 years and c...
101 years and counting's picture

what do they know?  reality? 

Fri, 10/26/2012 - 14:39 | Link to Comment SheepDog-One
SheepDog-One's picture

If this was an 'unintended consequence' of the FED and they couldnt see it coming then they should all be arrested immediately as incompetent bumbling lunatics who have cost us untold trillions for nothing.

Fri, 10/26/2012 - 19:26 | Link to Comment El Hosel
El Hosel's picture

 When pigs fly lunatic bumbling Banksters go to jail.

Fri, 10/26/2012 - 14:40 | Link to Comment Dr. Engali
Dr. Engali's picture

High yeild bonds know that no matter what kind of savvy name that you give them so they sound less risky, they are still junk.

Fri, 10/26/2012 - 14:43 | Link to Comment Quinvarius
Quinvarius's picture

They were probably just watching CNBC when Kaminsky yelled "fire" in the empty theater and nothing happened.

Fri, 10/26/2012 - 14:45 | Link to Comment Orly
Orly's picture

Looking at the chart comparison, it is clear that the outlier here are the junk bonds.  It must mean that the bonds are taking on higher yields because they cannot find buyers, so the big money boys must be anticipating something big to happen in equities- in a negative fashion.

Yields on the US 10-year note have been dropping, as well, though not as much as I thought they would given the apparent failure of QEtc.

Please correct me if I am wrong.

:D

Fri, 10/26/2012 - 14:48 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

You make sense...........so in a totally manipulated market you must be wrong. :>)

Fri, 10/26/2012 - 14:50 | Link to Comment Orly
Orly's picture

War is Peace, Winston...

Fri, 10/26/2012 - 14:59 | Link to Comment Winston Churchill
Winston Churchill's picture

If you cannot beleive any figure now ,why are we thinking that everything is

not being manipulated also.Yardsticks only work if you measure from the end.

Fri, 10/26/2012 - 14:59 | Link to Comment disabledvet
disabledvet's picture

"junk is junk." what was the story again? oh, yeah. "don't drill for oil" and "natural gas is a bad idea too." so are "windtowers and eating." but go ahead...plunge the entire Middle East into WWIII! Yeehaw!

Fri, 10/26/2012 - 16:27 | Link to Comment drivenZ
drivenZ's picture

you're sort of right but mostly wrong. There is no conspiracy. HY trades with equities. equities are down and high yield is down. no conspiracy. Also, as mentioned in the article HY supply has been huge recently, which has the obvious effect.  

 

to add to this it's no secret that people were expecting a pickup in volatility into the end of the year. One needed only to look at the VIX curve. A shift into lower beta/vol credits is expected. 

Fri, 10/26/2012 - 16:46 | Link to Comment Orly
Orly's picture

I didn't mean there to be a conspiracy.  I was just asking what was going on, as I am trying to understand the bond markets better.

I thank you for your response.  I hear you saying that there is a lot more HY available at the end of the year as companies try to attract buyers in the last quarter but with that availibility, it is compounded by many other buyers getting out of the HY space to avoid risk as the volatility increases.

Also, that would mean that these bonds are priced as options are, according to the VIX or some other measure of volatility and not necessarily according to their own financial condition.

Again, thanks for answering.

:D

Fri, 10/26/2012 - 14:54 | Link to Comment Monedas
Monedas's picture

Rotating Up Spread Rectum, Bitchez !    Oh, hi Orly .... didn't see you come in !

Fri, 10/26/2012 - 14:55 | Link to Comment NoDebt
NoDebt's picture

I bought some in '09 (not at the lows, unfortunately).  I did it almost out of disgust for what was being stamped triple-AAA or investment grade back then (still now, actually).  I figured they're all junk anyway, in reality, so maybe I can get some yield while I'm holding it.  Just didn't perceive much more risk in junk than in triple-AAA after the ratings agencies were shown to be completely fraudulent.  So out went the IG and in went the garbage.

Not the greatest reason to invest in something, obviously.  But I'll take a win where I can get one.  Starting to lighten up now.

Fri, 10/26/2012 - 15:25 | Link to Comment DowTheorist
DowTheorist's picture

Junk bonds may be "sensing" something is wrong.

Long-term treasury bonds seem also to be sensing trouble ahead, albeit in a more disguised way. Trouble is only apparent when compared with gold.

the long-term bond / gold ratio is very close to displaying a huge bear market signal which would imply the end of the correction for gold and real trouble for long term treasury bonds. If bonds enter a bear market, what would happen to junk bonds? Not a nice picture.

More details of the bond/gold ratio, what to look at and what it is saying us here:

 

http://www.dowtheoryinvestment.com/2012/10/dow-theory-spells-trouble-for...

 

 

Fri, 10/26/2012 - 16:07 | Link to Comment Martin T
Martin T's picture

"Equities = Hope, Credit = Reality, unfortunately, Reality follows Hope until the Hope dies, then Reality settles in."

People are trading on hope: "Please make Mario Draghi keep his word".

"So far the devil's best trick has been to persuade us that risk-free interest rates did exist. It ain't working anymore and that is a big cause of concern." - Macronomics.

Fri, 10/26/2012 - 16:15 | Link to Comment max2205
max2205's picture

Equity trade today was pure crap

Fri, 10/26/2012 - 19:20 | Link to Comment El Hosel
El Hosel's picture

Yeah crap,   four years of groundhog day pure equity trade crap stacked to the moon.

Fri, 10/26/2012 - 16:37 | Link to Comment bondman1
bondman1's picture

They know large bid lists will hit the street Wed. morning after the hurricane's damage is assessed. Smart bond mangagers have raised cash already. I doubt banks will be putting up much of their own capital when the bid list avalance hits. TBT looks like easy money.

Go Giants!

 

Fri, 10/26/2012 - 17:32 | Link to Comment Bob Sacamano
Bob Sacamano's picture

Wish the graph went back to say 2005 for some more historical context. 

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