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The Four Charts That Corporate Bond Managers Fear The Most

Tyler Durden's picture




 

Much is made of the 'apparent' bubble in Treasury bonds - a 30-year or so relatively consistent trend in government bonds (through thick and thin) and yet allocations remain minimal compared to our increasingly similar Japanese friends have experienced. It would seem to us, thanks to Bernanke's 'visible' hand that the real bubble is in spread product - as rates are so compressed, investors seemingly oblivious to the word 'risk' (unintended consequence) have flooded into ever-increasing yield/spread products - with high-yield bonds now dominated by these technical inflows (as we noted in the close today). If ever the combination of anchoring bias, 'dance while the music is playing', and herding was evident, it is in corporate credit. To wit, the total disengagement from reality (both real 'micro' earnings and 'macro' economic uncertainty) that a flood of money has created in this increasingly crowded (and increasingly-er illiquid) market. Managers are well aware that the liquidity tsunami has moved the maturity mountain (as Citi's Matt King notes) but has helped the weeds as well as the roses.

 

The front-running risk-averse yield-seeking flood of money into corporate bonds has technically crushed spreads...

 

But it has reached epic proportions of disconnection in recent quarters as 'micro' earnings have missed expectations (inverted on scale below - presented as distance from pre-season expectations we have had 5 quarters in a row of misses) but spreads continue to compress...

 

and given the massive (almost unprecedented) levels of 'macro' policy uncertainty, the flow of safe-haven-but-yield-chasing cash has broken the link between the reality of risk and the pricing of risk...

 

and has therefore removed signaling-effects from this critical market. More importantly, the wall of liquidity that has been squeezed into a relatively small market has lifted all boats and enabled the entire maturity structure of corporate debt to be kicked down the road - unfortunately enabling the dead to live 'unproductively' far longer than they ever should - necessarily dragging mal-investment in at every turn...

So this leaves corporate bond managers 'dancing while the music plays' yet fully aware that the market simply cannot bear the type of exit that will occur should reality ever seep back into the market's pricing (say by a fiscal shock?). As Dory would say "Just keep swimming..." as Bernanke has interfered with nature...

 

Charts: Citi

 

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Wed, 11/14/2012 - 20:32 | 2982219 Yen Cross
Yen Cross's picture

 Consumer credit?

Wed, 11/14/2012 - 20:56 | 2982221 MiddleageThinni...
MiddleageThinninghair's picture

Sorry, a little off topic but what is with the Spanish stock index, $IBEX, ?  Massive ram up to open an 10434.

Thu, 11/15/2012 - 00:48 | 2983082 Yen Cross
Yen Cross's picture

IBEX close 11/14

IBEX 35 7673.00 7673.00 7756.50 7642.80 -20.40 -0.27% 14/11

Wed, 11/14/2012 - 20:36 | 2982234 Cdad
Cdad's picture

...unfortunately enabling the dead to live 'unproductively' far longer than they ever should - necessarily dragging mal-investment in at every turn...

Ain't that the f'n truth!  And keeping all of these f'n bankers alive and employed all this time, too.

Thank you, Ben Bernanke, for this wasteland you have created.  You best be shuffling off now to spend more time with family...before this f'n cat gets out of that f'n bag.

Wed, 11/14/2012 - 23:39 | 2982257 TruthInSunshine
TruthInSunshine's picture

The potentially least acknowledged yet potentially most disturbing corollary to the "soaring profits" many publicly traded corporations just reaped:

There's a record amount of corporate debt that's been floated in the form of corporate bonds (aka debt) sold during the period of those soaring profits, surpassing the highs of the bubble point in 2007.

Corporations were essentially lured into floating massive amounts of debt via corporate bonds that yield record low amounts thanks to the suppression in U.S. Treasury Note yields (corporate bond natural competitor and determinant of yield) that The Bernank made possible. This is merely another bubble created by Bernank'd, broken markets.

I maintain that, in the full context of what lay ahead, corporations made a deal with the devil (Bernanke), and the savings on interest rates they'll reap will pale in comparison to the debt they re-incurred, much of which could have been reduced or eliminated, but that will now have to be repaid during a period of potentially not-so-good-times (nor cash flow).

Wed, 11/14/2012 - 20:51 | 2982238 fonzannoon
fonzannoon's picture

So most high grade corps have issued tons of debt. More than they probably needed to, with long maturities. They retired old debt and now have a ton of cash. If rates spiked most companies would simply not issue new debt right? Unlike treasuries which are constantly rolling over short maturities and would get crushed. I won't include high yield here. Just trying to distinguish between investment grade corporates and treasuries.

edit TIN please elaborate if you don't mind. I see the deal with the devil where they got away with issuing a ton of debt at incredibly low rates. I am not sure how the reprecussions come into play. I feel like they got away with one.

 

Wed, 11/14/2012 - 20:52 | 2982309 Dr. Engali
Dr. Engali's picture

Exactly right. That is what I tell people every time somebody says "but corporations have tons of cash". Yeah so what, they have tons of debt too, and they aren't going to part with that cash as they are going into survival mode. It won't take them much to service the debt at their current rates, and they probably won't ever see these rates again.

Wed, 11/14/2012 - 21:01 | 2982347 fonzannoon
fonzannoon's picture

Doc put a bow on this for me because I am not 100% here. I get that they have a ton of cash, and I get that they have a ton of debt. But as you said, and I said above, they scored huge. It won't take them much to service that debt at current rates. My point is the high grade, quality companies issued that debt going out 10yrs plus, and they probably issued more than they need to. So if rates spiked they won't have to worry for a long time.

Junk will get slaughtered and treasuries as well. I am just trying to make a distinction on investment grade (non financial). Or am I wrong?

Wed, 11/14/2012 - 21:15 | 2982398 Dr. Engali
Dr. Engali's picture

I would think that the investment grade multinationals would do fairly well as junk get creamed. The part that I go back and forth on is treasuries. I can't see how the Bernank can ever let rates rise so he will just keep printing. It's going to take a pretty big player to take a dump in the market for treasuries to get hammered. And if they wanted to take a dump, could they catch a bid. It's a conundrum to be sure.

Wed, 11/14/2012 - 21:33 | 2982450 fonzannoon
fonzannoon's picture

Well now you are entering the Marc Faber type conversation. Treasuries will be scortched earth. Bernak could print until he was blue in the face and rates would stay low nominally. But everyone would know they are a broken investment. High yield would freeze up at first (maybe soon?) and then you would see bankruptcy's left and right. Stocks would tank. But the question is, what (paper) would you want to hold? My guess is energy and resource stocks, and huge multi nationals (equity and credit). Granted you would probably get hammered, but at least you own (paper..I know I know...) something legit.

Wed, 11/14/2012 - 21:37 | 2982464 Dr. Engali
Dr. Engali's picture

That's about the way I see it.

Wed, 11/14/2012 - 22:39 | 2982620 TruthInSunshine
TruthInSunshine's picture

fonzanoon, why shouldn't/wouldn't prudent corporate fiduciaries RETIRE rather than roll over debt, no matter the interest rate refi "savings" to be had?

It's not really saving money by paying less interest when an entity could pay no interest on a batch of debt and pay off the debt instead, right?

I will bet money on this (in some ways, I have):  We'll soon see another period where deeply indebted corporations, as well as deeply indebted and highly leveraged private equity firms (think Burger King type leveraged buyout plays for a moment- you know the kind- where PE comes in and loads the entity up to the gills with debt), see what were fat profit margins (much of which was created by central banks bending yield curves, which won't go on forever) disappear, and will wish (or whose shareholders or partners will have wished) they had paid off debt while they were able to.

Wed, 11/14/2012 - 22:41 | 2982680 fonzannoon
fonzannoon's picture

i think i hear you, and i have no doubt the confusion is on my part. you are using burger king, and i am talking about eli lilly (for example). i mean that high quality non financials can raise a ton of cash to be used (for example) to expand into asia or something that could generate a lot of future revenue. to issue 15 year debt at 2.5% i can see why a lot of these companies did it. well at least the ones that will be smart with the cash. i think anything speculative gets wiped off the map.

Thu, 11/15/2012 - 00:16 | 2982995 NoDebt
NoDebt's picture

Sure, they could do that.  But who wants to run the risk of being caught short of liquid funds in this environment?  If the interest rate owed on debt is the same as the interest rate earned on the cash pile (most especially when that rate is damned near zero on both sides of the ledger) who cares?  Carrying a big debt load costs pennies.  Not having enough cash on hand if it's needed could quickly be the end of the company if there is a shock to the economy (fiscal cliff, etc.).

Those corporate CFOs remember what it was like when the credit markets froze up in 2008 (no matter how good your balance sheet looked).  They know nothing has really changed since then- they could easily freeze up again at exactly the moment they need access to cash the most. 

Nah, nah, nah.  Fool me once, shame on you.  Fool me twice shame on me.  I'll keep the "Scrooge McDuck" cash pile right here where I can touch it, thank you.

Thu, 11/15/2012 - 07:59 | 2983408 Go Tribe
Go Tribe's picture

You got it. If there's a black swan in plain view, it's the notion that QE can save us. There's a lot of hope riding on that one.

Wed, 11/14/2012 - 21:18 | 2982402 Yen Cross
Yen Cross's picture

 Sandy sold you "10 generations" of wisdom FONZ!  Beautiful people looked out, and shared with you!

   Take your "beautiful family & mind", and get the hell out of Dodge!

Wed, 11/14/2012 - 21:41 | 2982477 fonzannoon
fonzannoon's picture

Thanks Yen, nice job with those trades yesterday, I was thinking about that as shit unfolded today.

Wed, 11/14/2012 - 21:57 | 2982528 Yen Cross
Yen Cross's picture

Isn't about the trade. It's about you "seizing" an opportunity... I have traded for many years, and getting it right 3-5% of the time works.

   You have been given a "masters degree" in trading... Use it wisely ;-)

Wed, 11/14/2012 - 20:59 | 2982341 buzzsaw99
buzzsaw99's picture

the bernank's plan is working flawlessly. He and his banker buddies corner the gubbermint backed debt market and everyone else gets fukked with junk stocks and bonds.

Wed, 11/14/2012 - 21:13 | 2982393 pitz
pitz's picture

Corporate debt is a lot more sustainable than consumer or government debt.  At least corporations produce stuff and have collateral that can be seized.  Try to seize collateral from consumers on a significant basis and eventually you'll be looking at the motherfucking business end of a firearm.  Same shit with government, sovereign immunity prevents creditors from seizing collateral short of war.

Wed, 11/14/2012 - 23:44 | 2982915 TruthInSunshine
TruthInSunshine's picture

Corporations have collateral that can be seized, except this means very little to nothing given that many corporations have net-negative valuations, and even in the case of those that actually have significant assets to be culled, in any liquidation whereby "the many" hold liens, those with secured/priority/senior status (the vast minority) get paid first (and even then, it's often a fraction of what they're owed, while unsecured/junior lienholders might as well wipe their ass with their "claims" - hey, just like shareholders get to do!

Wed, 11/14/2012 - 21:23 | 2982411 WhiteNight123129
WhiteNight123129's picture

Japanese debt situation has to be netted by domestic absorption and foreign flows from trade surplus, when those fail we have trouble. The treasuries are in trouble from the start under those two factors, it becomes mathematic when Yuan start to push out the US treasuries in foreign central bank, the price might go up if Ben prints, but the value will go down at the same time through currency debasement, shorting treasuries is like borrowing from uncle sam at 2.7% for 30 years, by Silver Tobacco etc with the proceeds, this bargain borrowing will not last...

Thu, 11/15/2012 - 00:32 | 2983041 reginald
reginald's picture

Hypothetically, if you were all-in on fixed interest would it be prudent to now diversify back into cash?
Does anyone know the last period when diversified fixed interest had negative returns?

Thu, 11/15/2012 - 01:42 | 2983167 Milton Waddams
Milton Waddams's picture

Yeah, it's probably a decent time to begin legging out of that laddered bond portfolio... if I understand your question correctly.

Thu, 11/15/2012 - 01:33 | 2983155 Milton Waddams
Milton Waddams's picture

Yes, ZIRP at the lower bound has "pushed" capital into dividend yielding stocks, corporate debt, mortgage back securities, et al. in search of yield. Bernanke predicted this result. One small problem: what happens when the "risk free" rate of return once again emerges as a competitor to the myriad of other "risky" asset classes?

Thu, 11/15/2012 - 06:34 | 2983362 Sechel
Sechel's picture

There's a huge bubble in auto securitizations, where credit quality is down and largely responsible for the resurent auto industry. Basically the only way we can sell cars is by lending money who can't afford to buy them. This is not a sustainable business model.

Thu, 11/15/2012 - 08:18 | 2983430 Grand Supercycle
Grand Supercycle's picture

WILE E. COYOTE crash update:

As mentioned, equity outlook is increasingly bearish now the election is over.

Current bearish price action comprises the first installment of the very overdue Wile E. Coyote sell off.

The previous SPX meltup - devoid of healthy retracements - has caused the coming crash.

One can only stretch the bungee cord so far before it reacts...

SPX / DOW / NASDAQ daily chart downtrend continues.
SPX H+S pattern on daily chart continues.
SPX likely H+S on weekly chart continues.
AUDUSD daily chart rising wedge confirmed (ie bearish)
Wildcard ~ possible EURUSD rally if bullish news is announced.

http://trader618.com
http://tinyurl.com/ZH-Forum

Look Out Below.

Thu, 11/15/2012 - 09:23 | 2983549 madcows
madcows's picture

People's money needs to be placed somewhere.  They have limited options.  Either in equities or bonds or fixed income.  Equities have been pushed sky high with QE, Fixed income has been destroyed by real inflation, and bonds have been ZIRPed.  They are all risky at this point.  So, people are in bonds b/c to them it seems the least risky.

Of course, in the end, when the mother ship crashes, ain't nothing will be left but the pieces.

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