Yelling 'Fundamentals' In A Crowded 'Corporate Bond Market'

Tyler Durden's picture

Thanks in large part to the supply-constructing yield-compressing repression of a few 'apparently well meaning' bad men running the central banks of the world, the divergence between fundamental weakness and credit spread 'strength' is at record levels. The overwhelming 'technical' flow of funds from investors combined with an 'end of equity' cult and belief that tail-risks have been removed (OMT) juxtaposes with earnings crumbling, ratings downgrades, and the exogenous fact that a complex system means a systemic crisis is inevitable (especially after such ongoing volatility suppression). As Citi's Matt King notes, while "it is almost impossible to predict exactly when they start," the desperation for yield has led to highly unstable equilibria - as what investors can't earn they will lever; via lower-quality 'levered' assets (PIKs and BB/CCCs for example) or 'levered' vehicles (CLOs and structured credit). Sure enough, margins (street repo haircuts are low and NYSE margin accounts high) look very 2007-like. While yelling 'fire' in a crowded theater will typically get the people moving, it seems the movie that is playing in corporate credit is simply too engrossing for many to listen.


Central-Bank repression and investors' demand for some safety has crushed the yields of the most liquid sovereign bond markets...


and constrained supply of even the safest of non-safe securities...


And given the size of the 'credit' markets in general, there is fewer and fewer yield opportunities to go around...


as investors faced with little choice but to 'opt for the risky upside'... no matter how concentrated that risk is...


Which led to the second best year ever for corporate credit!!


However, this technical flow and overwhelming drive for yield is completely ignorant of the fundamental shifts occurring under the surface as yet more markets become dislocated from any signaling ability...


but fundamentals are not keeping up - especially now the new normal is to borrow cheap and dividend out...


which of course will eventually be capped by an unacceptable rise in leverage...


and while ratings agencies get that credit cycles 'cycle' and have actioned ratings downgrades on a large scale, the actual defaults remain limited thanks to the ability to roll debt (due to the self-sustaining liquidity pump)...


Which, due to at least modest risk-management in the highest quality credit, has led to a drop further and further down the credit quality spectrum - that appears to be nearing its limit to some extent..



and so managers demand more leverage (and dealers are willing to provide it given their unlimited backstop)...


and its not just credit - equity managers are almost as levered at they were at the peak in 2007...


and while forecasts for 2013 appear positive in general (with perhaps some first half volatility), the modal 'numbers' being offered hide the massively distorted distribution of possibilities awaiting those over-levered and over-exposed to corporate credit...


As Citi's Matt King summarizes the firm's recent credit conference:

As much as we can feel that the market wants to rally hard, and probably will if the fiscal cliff can be surmounted, we remain just as concerned that it will reverse that rally immediately thereafter – at least until the central banks up their injection of liquidity once more and the whole cycle begins again. The tension between market exuberance and deteriorating fundamentals is simply too great. When 1100 investors have a craving, it’s hard not to think they’re going to do whatever it takes to satisfy it. But equally, when you’re in a crowd of that size, it’s probably worth keeping an eye out for the nearest exit - and long before any fire actually starts.

The thundering herd remains.. for now.


Charts: Citi and Goldman Sachs

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Yen Cross's picture

 We have VWAP, why not model forecasts? Oh I forgot VIX!

  In all honesty, Tyler and his crew put some serious research into this post. When you study the(blue) curves Tylers brillance will be revealed/

Oh regional Indian's picture

You don't surmount cliffs, you turn away from them. Which in the case of a thundering herd, is a problem.

India's thundering corporate started getting "easy" PE money some time in the 2003-2004 time frame to do ill-advised take-overs like the british pigs Jag/Land Rover by Tata. Expansion funds for notoriously regulated industries like mining/INfrastructure were all the rage.

In the last year, that spigot has dried up and the Indian Corporate bond market is as dry as a river in the Sahara. And a concominant slide in earnings as managers always seem to get addicted to easy money. FUnny how that works.

This is the great global credit squeeze a la 1929.

The bankers calling/culling the herd. Only brown nosing pole smokers expected to survive.

Time to bold with money again, but in little ways. Micro-investing (go to a crowdsource site and put a couple of hundred bucks, you never know)....

The next big thing is too small for the panicked herd to notice (for now)...


A different In-vestment


GetZeeGold's picture



Elections have consequences and all your bonds are belonging to us - Emperor Bam Bam

Sextus Empiricus's picture

Numbers?  Charts?  Forecasts?

"Bonds?  They're up for sale if you want them.  You don't need to see any charts..."  *Hand wave, Jedi mind trick*

knukles's picture

Any discussion of the ittie bitty teenie tiny spreads available today for credit products remind me of past episodes many moon ago (dating myself here, kids) when once all the rage in HighyoeldLand were "PICKS"  Payment in Kind Securities.
Took the idea from the Fed.
Not Good.....
The deal got issued, looked and smelled like regular piece of paper until y'all saw it waddle at coupon payment time.  Ya Got a New Additional Security, just like the Old One Ya Already Had, Ya Just Had More of Em, and as Any Normal Bonehead can tell ya, More Is Better.

Then when the deal defaulted, the issuer could always say next time around that yes, a prior deal had defaulted but He Had Never Misses a Coupon Payment .... with a straight face, in front of a Jury Under Oath.


Pull my principle.

Yen Cross's picture

currencies/equities same game different name...

kaiserhoff's picture

Snorted beer again.  I should know by now.

You say the same things we all say, Knuks, but you say it better;)

PUD's picture

Tyler..go out on a limb in a post...when will the last straw be placed upon the camels back? What will it be? What will be the tip off?  When will it be clear that house of cards is crumbling?

Sextus Empiricus's picture

War is usually a good mask for an economic collapse.

Sextus Empiricus's picture

All I learned from my useless reading of random philosophers/sociologists/homeless people is that everything has a pattern.  I'll just say this...

If you look at the numbers on the bond yield...

Sink before WWI

Sink before WWII

Slight sink before Vietnam

WWIII coming to a Middle East near you?  We shall see.  I take it all with a grain of salt because patterns can always be broken (and a pattern could just be an anomoly that appears to be a bonafide pattern), but the pattern I see is worth noting.

earleflorida's picture

The ME means literally shit to the U.S., that's why the Arab spring was fomented-- the U.S. wants out, period! 

Sure, they'll backup Israel, but there's no need to... as long as big mouth 'Netanyahu' keeps his fucking mouth shut. Iran has new leadership and the sanctions have cured their insolent  animosity via irrational intolerance... especially now that Ahmadinejad is gone. Oh, lest I forget how the worse POTUS Carter really fucked-up with Iran, and the Shah of Iran in 1979... not to forget giving future credits a mention to the 'worstest obie-kenoby'.  

Israel needs no one 'now' for energy dependence is there's. Desalinization will cure water shortages now that they have energy to operate exhaustive power requirements. 

TPTB have their eye's on the grand prize-- 'The Fossil Spirit Incarnate'... indeed, the alpha-male hydrocarbon's 'Soul Sister... Diaphanous Gas'! Which will now in the very near future 'power-rule' the world's energy needs for the next century or two [jmo?].  As the Rubicon's bridge is about drawn, close-the-black-gold-spigot! 

The power elites have been planning this NWO coup for a decade or more, and all has been divvied up! CHINA, and Russia to a smaller, very small degree will rule, while the US and sorry 'Old,`Ole Europe' will settle for sloppy seconds. The 'Supremes' Establishment...`Mr. Power's Elite', has made his[is?] decision, as China will be 'Top Dog', with Japan and Taiwan, to 'Toe the line'!


thankyou Tyler 

h0oS's picture

The US doesn't bother declaring war any more. In case you hadn't noticed we are in the middle of a range of covert and less covert wars already. Keeping in mind that the US military will not attack any country that can defend itself it seems that Palestine will remain the object of overt US aggression via Israel for at least until Hamas can properly disrupt Israeli life.

One thing is for sure, the old Chinese saying "He who sows the wind will reap a super fucking storm". Just as Rome ran out of tricks to fund its exorbitant military campaigns and spluttered its way to a dismal and long end so will the US collapse under huge war budgets while "Obama Phone" continues to trend upward in GOOG.

The game is all but up and the only things I keep in the bank now are my liabilities. Today I bought gold at 2.5% surcharge on my credit card. That is a small price to pay to destroy the currency, that's another sign of how little it's worth.

Sextus Empiricus's picture

You're very correct.  But the undeclared war has racked up so much debt that the charade is collapsing.  Remember Rome was left so deteriorated by its meanderings that it couldn't defend itself anymore.  America doesn't have that problem (no one is going to sack America), but reorient the pieces and realize nothing new happens under the sun.  That's my point.

A big declared war might fix that.  Nothing like rallying the sheeple behind something really epic and destructive.  People need their 2 minutes of hate because the whole war on terror has left people disillusioned and tired.  Not as much hate to profit from as there used to be.  "Oh, we got another terrorist?  Yippee..."

War bonds, war bonds!  Support the troops!  Shop, shop, shop!  Support the troops and the economy! 

Don't mind the man behind the curtain! 

Watch out for the Syria fiasco.  Neo-cons and libs in power are salivating at the opportunity to attack another country that never attacked the US.  But this time, Russia, China, and Iran won't be too happy with the US piddling with their interests.  And the time is ripe for a big conflict in the coming years.

I have a hard time seeing a big war with the world as connected as it is by the Internet, but remember that it was hidden alliances and interests that started WWI.

h0oS's picture

Fair play, generally agree with your comments. Here's the black swan, America will be sacked, by civil war. A long shot? Maybe but secessionist movements along with racial tension and weakening economy and a fearful, armed and angry population mean the declaration of a large overt war could backfire. The reality is the US is well overstretched militarily and its adversaries know this.

Add to the mix the rampant hysteria of an army of radio hosts, blogs and local media outfits that routinely pour fuel on the fires and you quickly see the scale of the problem. This situation will be a clear opportunity for elements keen to deal the US months of internal strife and perhaps blow hard enough to see the odd state make a bid to break free.

Right now the US is probably at a the lowest point in its unity than at any time since the Vietnam war. No nation on earth would bother with a direct military strike on the US, rather focus the resources on igniting class and race war internally, such a strategy is cheap and difficult to trace back.

Don't expect the next war to be fought free from US soil.

Sextus Empiricus's picture

I can go with that. Here's the only caveat I see in the civil war business... the Department of Homeland Security has something like 325,000 employees and is armed to the teeth with all kinds of gadgets... automatic weapons, humvees, body armor, drones, plus the intelligence web of a Big Brother state.  The DHS is actually larger than most armies in the entire world.  I wonder how a civil war scenario plays out if there is what amounts to a standing army on American soil (with no allegiance to the Constitution or anything of that sort, I might add... at least military members take an oath and most live by it).

The DHS activities in the last few years (especially this year) have me thinking a bit...

But it's all just speculation.  Although I'd say our speculation is probably better than betting on an asteroid hitting the planet on Dec. 21 or some nonsense.  Speculation with facts can serve like a crystal ball.  I just remember, though, that Denethor looked into the Palantir so long and saw so much evil that he went mad and killed himself.  Turns out what he saw was true... he just didn't see the whole picture.


SaveTheBales's picture

Tired of DHS?

Take the warning labels off stuff; let Darwin sort it out.

max2205's picture

When rates are allowed to go up the market will go up 200%

Checkout 1951 ish

fonzannoon's picture

Bullfuckinshit. When rates go up it will either be because someone had the balls to cut 17 trillion in debt and entitlements and start to reward savers again. In that case, after the market resets about 70% lower, maybe your rally can start.

Or more likely rates start climbing because people start seeing the thin ice they are standing on and start heading for the exits. I am pretty sure that someone fleeing a bond fund ain't gonna be running for an equity fund. They will be either heading for cash or hard assets. The ensuing spike in rates would take down the housing market and spark an instant depression that would make the 30's look like a carnival.

If anything this perpetual state of limbo should probably be appreciated a little more, because it ain't gonna last.

TheSilverJournal's picture

Rates won't be allowed to go up. That's the real deal. Rising rates will deflate asset prices and crush the banks, so that's a no no...oooooooooooonnnnnnnnnnnoooooooooo.  Rates stay low straight through hyperinflation. The Fed canand will print as much as needed to buy enough bonds to keep rates low. No. matter.  what. Better bet is buy silver. monetary ponzi is set to collapse and fiat and bonds wealth will be transferred to real things. Not housing, buecase housing is held up by bonds and bonds are no more. Gold and silver.

midtowng's picture

This is a great article. Things are back to where they were in 2007, at least in the credit markets.

The difference is that there won't be any major bailouts coming this time. The entire banking/financial system needed to be reformed in 2009. It wasn't. Soon we will pay for that spades.

nastaking's picture

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