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The Perfect Storm In Bonds

Tyler Durden's picture


The Fed has managed to remove some of the complacency in financial markets for now, but we would also argue that financial markets have managed to remove any complacency the Fed (and any other central banks) may have had regarding how easy the exit strategy from QE was going to be. As we discussed here, the market and the Fed are trapped in a prisoner’s dilemma, and, as Citi notes, the events over the past three weeks make it clear that 'collaboration' is the best strategy – i.e. a non-complacent market and no hawkish surprises from central banks. There is a big risk to this scenario though. As Citi explains, a risk that we fear not even the recent dovish messages by central banks may be able to do much about.

The recent sell-off has, unlike the previous sell-offs this year, managed to trigger outflows in funds and ETFs; as we mentioned above, our credit survey reports the first outflows since 2008. The negative feedback loop which has been triggered around fund and ETF outflows has gained a momentum of its own and the following four charts suggest bonds are in fact primed for the perfect storm.

Via Citi,

The credit market may have never been more vulnerable to rising Treasury yields.


MTM investors make up a much higher proportion of credit investors now than normal,

and MTM risk itself is near all-time high.

amid record low breakevens (i.e. a need to reach increasingly for yield)

and extremely crowded positioning

In the last few days, the market has calmed down, but the ball is not now so much in the Fed’s or institutional investors’ courts, but in those of retail investors.


Whilst institutional investors will likely be happy to “collaborate”, in our view, we’re not sure if retail investors will. They will likely be receiving their quarterly statements in the next few weeks – how will they react to the recent negative performance on their funds? If the outflows continue, we see more downside in cash (vs. in synthetics) and in low beta credits (vs. higher beta credits) – the proxy hedging via indices and unwinding of what investors perceive to be their riskiest trades we’ve seen so far would be overshadowed by selling down those positions which (i) make up most of investors’ portfolios and (ii) are easier to dispose of in a capitulating market




What drew investor attention this week most notably - as we discussed all week was Cash lagging CDS. As Citi explains, in general, we are seeing cash bonds underperforming CDS in our sectors in the most recent market volatility. The rate-fear driven selloff, which led to substantial outflows in HY funds including ETFs, are putting more pressure on cash prices as investors are selling bonds to raise cash.

The bottom line is that we have 4 extreme charts that signal a perfect storm that is increasingly out of the hands of both institutional investors and the Federal Reserve as retail flows (once the darling of yield/spread compression) force unwinds in a vicious circle with hedging (via CDS) impossible given the redemptions.


Charts: Citi

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Sun, 06/30/2013 - 18:57 | 3708599 IMA5U
IMA5U's picture

This is it my fellow Bearz!


Gold rallied and credit is on its a55


I'm buying a shot gun, physical gold, and am locking myself in my bomb shelter.

Sun, 06/30/2013 - 19:04 | 3708624 algol_dog
algol_dog's picture

Good - Do us all a favor and don't ever come out again ...


Sun, 06/30/2013 - 19:12 | 3708644 LetThemEatRand
LetThemEatRand's picture

What is it with trolls and the "..." shit?  Is it in the powerpoint you received at the "meeting?"  Seriously, clue me in.

Sun, 06/30/2013 - 19:26 | 3708678 Town Crier
Town Crier's picture

I'm still short Treasuries, owning shares of TBT, and I'm still short the stock market, owning shares of SPXU.  But I feel like a caveman who correctly saw that the glaciers were going to go South, and bet everything on that correct insight, confidently explaining, "it's not a matter of if; it's a matter of when!"

Sun, 06/30/2013 - 20:11 | 3708768 LetThemEatRand
LetThemEatRand's picture

I fear that we're going to be the iceman found recently in Austin.  "Scientists believe that he was shorting the S&P when he died."

Sun, 06/30/2013 - 20:20 | 3708781 derek_vineyard
derek_vineyard's picture

work your way out the risk spectrum and bonds become suicidal

i have some 7% junk bonds at par to share with you all   :)

Sun, 06/30/2013 - 19:13 | 3708646 TheDarkKnight
TheDarkKnight's picture

So.. what happens when you run out of gold to eat? Gonna start eating those shot gun shells i presume.

Sun, 06/30/2013 - 19:14 | 3708652 LetThemEatRand
LetThemEatRand's picture

Ditto to my question above, though you only used two dot dots.

Sun, 06/30/2013 - 21:39 | 3708955 jon dough
jon dough's picture


"Ellipsis...is a series of dots that usually indicate an intentional omission of a word, sentence or whole section from the original text being quoted, and though necessary for syntactical construction, is not necessary for comprehension."

"Ellipses can also be used to indicate an unfinished thought or, at the end of a sentence, a trailing off into silence (aposiopesis), example: "But I thought he was . . .".

"When placed at the beginning or end of a sentence, the ellipsis can also inspire a feeling of melancholy or longing. The ellipsis calls for a slight pause in speech or any form of text, and can be used to suggest a tense or awkward momentary silence."

Many cannot use ellipses as they should and should be shunned since they are...y'know.

Sun, 06/30/2013 - 23:52 | 3709183 CPL
CPL's picture

Belinda's peg leg swiveled to steady herself as her lazy eye wobbled into focus and found Ned's egg shaped head with a small trickle of slobber from the corner of his mouth. 

This is the man in my life...



Sun, 06/30/2013 - 19:47 | 3708727 SunRise
SunRise's picture

DarkKnight - There's probably 2 chances out of 3 that he's going to use the shotgun shells to eat your food.  YOU eat the shot, HE eats the food.

Sun, 06/30/2013 - 19:53 | 3708741 nmewn
nmewn's picture

lol...thats generally how it works.

Sun, 06/30/2013 - 20:29 | 3708791 knukles
knukles's picture

Nah, he's protecting you from yourself for your own good.

Sun, 06/30/2013 - 20:37 | 3708808 nmewn
nmewn's picture

Mental image of my right hand holding a dagger over my own head while the left hand grasps the right wrist and me screaming STOP!!!...lol.

Mon, 07/01/2013 - 01:48 | 3709300 TheMeatTrapper
TheMeatTrapper's picture

So.. what happens when you run out of gold to eat? Gonna start eating those shot gun shells i presume.

We have no intention of eating gold, just as you have no intention of eating paper. We believe gold is a superior store of wealth compared to paper. Perhaps you can review the most recent several thousand years of history for further evidence of this.

As far as shotgun shells are concerned, you do not eat shotgun shells. They are hard to chew and do not taste very good. You use shotgun shells to protect your life and to kill things to eat that are much tastier and tender than the shotgun shells themselves.  

Hopefully I've been able to answer your questions. If I can help you in any other way, please do not hesitate to let me know. Thank you for your questions. 

Mon, 07/01/2013 - 07:48 | 3709511 Himins
Himins's picture

Have you chewed on a 5 dollar bill lately? They're aweful no matter how long you boil them, you might try copious amounts of catsup, but that don't make them crunchey. 

Sun, 06/30/2013 - 19:17 | 3708659 Midasking
Midasking's picture

The entire treasury market is a ponzi scheme.. should be rated F http://tinyurl.com/pp588mj

Sun, 06/30/2013 - 18:58 | 3708603 fiftybagger
fiftybagger's picture

Metals bottom?

Sun, 06/30/2013 - 19:00 | 3708608 prains
prains's picture

more of a big bottom guy, sorry


pull plow good

Sun, 06/30/2013 - 19:08 | 3708634 LetThemEatRand
LetThemEatRand's picture

You know who is a big bottom?  Geithner.  And Kashkari.  

Sun, 06/30/2013 - 20:34 | 3708802 NoDebt
NoDebt's picture

Neel Kashkari- wasn't he the bad guy in 'Indiana Jones and the Temple of Doom'?  The one who could rip your heart out of your chest while it was still beating and show it to you?  Looks just like him, anyway.


Sun, 06/30/2013 - 20:38 | 3708813 knukles
knukles's picture

I first read Kardashian. 


Been spendin' far too much time in grocery checkout lines, Knuks

Sun, 06/30/2013 - 19:35 | 3708699 Silveramada
Silveramada's picture

could very well be, this week will tell us more, don't tell me you did not readi it and here it is, from few days ago...


Sun, 06/30/2013 - 19:01 | 3708612 Dareconomics
Dareconomics's picture

The situation will probably stabilize in the short-term, but they'll heat up again in August when everyone is on vacation.



Sun, 06/30/2013 - 19:03 | 3708619 LetThemEatRand
LetThemEatRand's picture

"the Fed [is] trapped in a prisoner’s dilemma"

I was just about to pop a cork and then I realized this is only an expression.

Sun, 06/30/2013 - 19:06 | 3708623 buzzsaw99
buzzsaw99's picture

I'm sure retail, seeing that markets are manipulated and that they are being spied on 24/7, will be happy to "collaborate" in their own fleecing going forward. Still waiting for the ad where prez O says: Please buy bonds, there are so many more brown babies in need of being droned to death all over the world.

Sun, 06/30/2013 - 20:32 | 3708796 knukles
knukles's picture

That was taped on the 18th green at Congressional with the plastic Doric columns.

Sun, 06/30/2013 - 23:32 | 3709148 spine001
spine001's picture

Do you guys knowbthat uncle Sam actually used the superman tv series in the 1940s to have Superman himself shameslessly ask kids an their parents to buy US Bonds. Sounds incredible but it is a true story. I have the video.

Sun, 06/30/2013 - 19:24 | 3708653 kito
kito's picture

Gold up 10 bitchezzz....the kito bottom is in.......

Sun, 06/30/2013 - 19:58 | 3708750 fonzannoon
fonzannoon's picture

I knew I would end up being the only one bummed out about gold being up.

Unless the etf can collapse in a rising gold scenario. Then I'm alright with it.

Sun, 06/30/2013 - 20:05 | 3708757 kito
kito's picture

Nice fonz...don't worry, I'm sure there is room on the downside....

Sun, 06/30/2013 - 20:06 | 3708758 LetThemEatRand
LetThemEatRand's picture

That could happen, but probably not in the next 6 months (PMs may go down sooner, but the ETF will only diverge when there is a real collapse).

Sun, 06/30/2013 - 20:11 | 3708767 fonzannoon
fonzannoon's picture

don't get me wrong, I hope kito nailed the bottom and we just rocket up from here I guess. Shit that is probably the best case. Maybe I should be careful what i wish for.

Sun, 06/30/2013 - 20:18 | 3708778 LetThemEatRand
LetThemEatRand's picture

I was hot and bothered last week thinking we hit bottom, but then I remembered that they have unlimited taxpayer cash and Blythe is still Blythe.   But somtimes you just have to say "what the fuck."

Sun, 06/30/2013 - 20:22 | 3708783 fonzannoon
fonzannoon's picture

Japan equities heading higher and their bond market is nice and calm. The twilight zone continues unabated.

Sun, 06/30/2013 - 20:24 | 3708786 LetThemEatRand
LetThemEatRand's picture

If I had a dollar for everytime I thought this was the end....

Sun, 06/30/2013 - 20:34 | 3708798 knukles
knukles's picture

....what the fuck...


No, no.  Get the dollar from Fonz, FFS

Sun, 06/30/2013 - 21:13 | 3708899 LetThemEatRand
LetThemEatRand's picture

I meant silver dollar.

Sun, 06/30/2013 - 21:43 | 3708964 jon dough
jon dough's picture

Yeah, that's how you use it.

Mon, 07/01/2013 - 00:53 | 3709260 Axenolith
Axenolith's picture

And hold to the old adage that "The market can remain irrational longer than you can remain solvent"...

Sun, 06/30/2013 - 19:18 | 3708657 q99x2
q99x2's picture

They wanted to control the world but their unbridled greed destroyed it..

Sun, 06/30/2013 - 19:26 | 3708677 MxBonanza
MxBonanza's picture

What is going to happen to gold when the stock market crashes?

Whitout any credible reason gold has dropped of a cliff. Will it go to $800?

I think that the recipe of a market crash is there, I just wonder what is going to happen with gold.

Sun, 06/30/2013 - 19:39 | 3708711 monopoly
monopoly's picture

MxBonanza: Good question. It would probably drop initially as many move to the sidelines and margin calls take even the one asset with value down. But that is when we must hold on as I feel it will be the first to recover and move steadly upward and onward as the real fundamentals become more obvious to the masses.

In any event, I will not be selling any.

Sun, 06/30/2013 - 19:43 | 3708718 CrashisOptimistic
CrashisOptimistic's picture

"MxBonanza: Good question. It would probably drop initially as many move to the sidelines and margin calls take even the one asset with value down."

I am confused.  There are margin calls on farmland?

Sun, 06/30/2013 - 23:55 | 3709188 CPL
CPL's picture

If you borrowed money to buy it.  That situation would be called 'interest'.

Sun, 06/30/2013 - 21:30 | 3708881 Taku
Taku's picture

Physical vs paper.

Paper likely drops with key event.

Physical continues selling but with higher premiums.


India increasing restrictions on purchases.

China may now exceed India (China ~ 800 tons H1).

~ 35,000 ounces = 1 ton


Sun, 06/30/2013 - 19:48 | 3708730 Treason Season
Treason Season's picture

Your answer lies in a short story written by Ernest Hemingway.


Sun, 06/30/2013 - 19:35 | 3708701 toadold
toadold's picture

People who want to sell gold say its going up. People who want to buy gold say it is going down. Any purchase of anything involves a certain amount of risk and the less you know about the market for it the riskier it is going to be for you. They say diversification can protect you but it is quite possible to diversify everything into losers.  

Welcome to the Ponzi. 

Sun, 06/30/2013 - 23:43 | 3709166 spine001
spine001's picture

God is funny, I own some and I don't want to exchange for any amount of fiat. At the same time I want it to go further down, my threshold is 890$.  When and if it gets there I will buy more. And I understand that my argument is financially wrong,

Sun, 06/30/2013 - 19:37 | 3708705 monopoly
monopoly's picture

Was it not nice on Friday? The trolls for the most part just vaporized and moved on to the landfills where they came from. Like a breath of fresh air. My guess is there will not be too many "brilliant" posts from those that disagree with us as we move forward. 

Just a hunch. 

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