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Chart Of The Day: Why Every Corporate Bond Manager Is Freaking Out

Tyler Durden's picture




 

As JPMorgan Nikolaos Panigirtzoglou explains,

The rising bond ownership by central banks has not only eroded bond overweights but has also made private non-bank investors very overweight credit. This is because QE programs like those of the Fed/BoE/BoJ, have mostly focused on government related bonds. Effectively G4 central banks have been “soaking up” government bonds forcing private investors to hold more corporate bonds. In addition FX reserve managers continue to focus their purchases on government related bonds with corporate bonds accounting for only 3.5% of their total bond holdings, according to stock data on foreign official institutions holdings of US securities reported by the US Treasury.

How big is this credit overweight? To answer this question, we calculate how much of the $24tr of tradable bonds held by non-bank entities is non-government related, i.e. corporate bonds. Given that almost the entire $7tr bond portfolio held by G4 central banks is government-related, only 3.5% of the FX reserve managers bond portfolio is invested in corporate bonds and around 60% of G4 commercial banks’ bond portfolio is invested in non-government bonds, we calculate that non-bank entities globally hold $13tr of non-government bonds out of their $24tr portfolio of tradable bonds. That is, 55% of their bond portfolio is invested in non-government or corporate bonds. This compares to a 38% weight of non-government bonds in the tradable bond universe of the Barcap Multiverse index augmented by Munis and Inflation linked bonds.

 

That is non-bank investors are implicitly overweight credit by 55%-38%=17% (Figure 3). This compares to a neutral weighting in 2009 (zero in Figure 3).

That is successive QE programs since 2009 have made private non bank investors increasingly more overweight credit.

Admittedly the ECB’s asset purchase program is different as it focuses on securitized and covered bonds rather than government bonds, at least at its early stages. So in principle the ECB purchases could somewhat reduce the credit overweight in Figure 3 at least for Euro based investors. But to the extent that the ECB mostly purchases these securitized and covered bonds from banks, the impact on non-bank investors’ positioning should be very limited. In addition the ECB purchases, projected at €400bn over two years, are too small relative to previous QE programs by the Fed / BoE / BoJ to reverse the rising trend of Figure 3.

In all the implication from the picture of Figure 3 is that private non-bank investors have found themselves, often unwillingly, becoming increasingly overweight credit as a result of QE programs and rapid FX reserve accumulation over the past few years.

So while the erosion of the bond overweight is supportive of a sustained low bond yield environment, Figure 3 points to more elevated credit spreads than in previous cycles to compensate private non-bank investors from becoming increasingly overweight credit.

*  *  *

That implicit overweight is a problem because...  the current level of liquid assets as a proportion of total HY assets is about as low as it has been tracking data back around 25 years.

 

and managers all know the market is mispriced...

 

But also know that it simply cannot handle the flood of sells should a small minority all decided it's time to sell.

 

 

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Mon, 10/06/2014 - 21:14 | 5297132 Lets Buy The Dip
Lets Buy The Dip's picture

Great port.

The tick data => http://bit.ly/1fMcakI is indicator the pros use, and has been deadly accurate lately, and hinting more dowside on Russell and Nassie soon. Short term.

Sentiment has been very negative; the markets have declined some and investors have gotten worried about economic growth, worried about Ebola, worried about interest-rate hikes from the Federal Reserve, and maybe about Bill Gross changing jobs. But really, we're still seeing, at least in the U.S., reasonable economic growth

 

Enough to give anyone an ebola tummy ache!

Mon, 10/06/2014 - 21:31 | 5297179 Newsboy
Newsboy's picture

I'm Long Ebola, which is awkward, since I'm short ME.

Mon, 10/06/2014 - 22:00 | 5297273 Fuku Ben
Fuku Ben's picture

Don't forget the weather

Tue, 10/07/2014 - 04:26 | 5297857 SAT 800
SAT 800's picture

The real bubble the Fed blew this time wasn't the Stock Market; which is comparatively small beans, but the bond market. this could easily be the axle nut that falls off the cart.

Mon, 10/06/2014 - 21:17 | 5297138 TeamDepends
TeamDepends's picture

>PM bottom is in
>Bonds are safer

Mon, 10/06/2014 - 22:06 | 5297269 BlindMonkey
BlindMonkey's picture

Junk bonds are shit so the opportunity to short junk bonds for explosive gains should be an Ebola aided lock at this point. You can't have enough explosive shit in your portfolio in this day and age.

Mon, 10/06/2014 - 23:04 | 5297446 OldTrooper
OldTrooper's picture

>None of the above.

Mon, 10/06/2014 - 21:29 | 5297169 AccreditedEYE
AccreditedEYE's picture

Ya know, this is the new era. If "folks" want exposure to gov bonds to match index performance they can do so via derivative. Holding the actual paper is not necessary. What I would like to know is what happens to these products once the CB cartel loses control of rates.

Mon, 10/06/2014 - 21:34 | 5297188 disabledvet
disabledvet's picture

Just follow natural gas and oil production numbers and nothing else matters.

Now we have the dollar soaring in value (save for today) and obviously you don't want to be anywhere near debt.

New York Minute Monday today in case anyone is wondering.

There was a huge merger today as well I believe...medical devices and "blood security."

Mon, 10/06/2014 - 21:39 | 5297204 Dre4dwolf
Dre4dwolf's picture

The CB sets the rates, how can they lose control.

They just call up the guy who sets the rate, and then tells them not to change the rate.

And then paper flies off or onto the shelves.

 

If no one buys the paper they do.

If someone buys the paper, great less paper they have to buy.

 

Its a lose lose lose lose lose situation for everyone except the people in the win win win situation.

Tue, 10/07/2014 - 08:30 | 5298182 eddiebe
eddiebe's picture

Accredited, why would they ever loose control? As long as they control the printers or the digital version thereof, they can goose any market to their hearts content. I do believe however that they will cause a new bond bear themselves.

Mon, 10/06/2014 - 21:41 | 5297215 q99x2
q99x2's picture

The central banks have to wash rinse and repeat. They can't expect to own the entire world in one giant wealth transfer. They are not known for letting any working person have a crumb.

Mon, 10/06/2014 - 21:51 | 5297242 buzzsaw99
buzzsaw99's picture

egad if credit is mispriced what does that say about equities? a total wipeout for many issues methinks.

Mon, 10/06/2014 - 22:23 | 5297324 disabledvet
disabledvet's picture

Depends on the equity. What has been proven thirty years running now is that equity produces pretty much zero liquidity for the economy at large.

Indeed it appears to create only State Bankruptcy.

Mon, 10/06/2014 - 22:00 | 5297274 Its_the_economy...
Its_the_economy_stupid's picture

God... I am getting depressed.

Mon, 10/06/2014 - 22:01 | 5297279 starman
starman's picture

Credit is not growth neither expanding it decades a head! Credit is debt!  

Mon, 10/06/2014 - 22:25 | 5297330 disabledvet
disabledvet's picture

Is credit an asset or a liability?

Mon, 10/06/2014 - 22:44 | 5297380 lasvegaspersona
lasvegaspersona's picture

yes

Mon, 10/06/2014 - 22:53 | 5297397 jarana
jarana's picture

Sorry, I don't go along with you in this point: "yes" is a liability.

Mon, 10/06/2014 - 23:10 | 5297461 MrSteve
MrSteve's picture

Not if one follows "neither a lender nor borrower be, for oft' both friend and loan are lost"

Tue, 10/07/2014 - 04:56 | 5297875 all-priced-in
all-priced-in's picture

To the lender it is an asset.

To the borrower a liability

Mon, 10/06/2014 - 22:02 | 5297280 Supafly
Supafly's picture

It was rough traversing those peaks in 4Q 2011, but that nice downslope in 1Q 2014 was rejuvenating.  Now the climb to the top.  20%!  Oh I can't breathe. 

Mon, 10/06/2014 - 22:29 | 5297340 MollyHacker
MollyHacker's picture

So a great buying opertunity is at hand, just tell your boss I'll leverage-up with you and that's how you'll get that 'pay raise' or just hang in there and do the buy-out.

Mon, 10/06/2014 - 22:45 | 5297379 jarana
jarana's picture

Ebola is a liquid ass set.

Update the above charts accordingly, please.

Mon, 10/06/2014 - 23:27 | 5297515 eddiebe
eddiebe's picture

Does anyone here think the central bankers will be happy indefinitely to get zero or next to zero % on the money they created?  

 Me neither.

Tue, 10/07/2014 - 01:02 | 5297703 paul steinert
paul steinert's picture

The central bankers make their fame  and fortunes not from the profits of their central banks, but from their connections.  Look at Greenie.....

It's not important that the central bank get anything on the money that they have created.  Just as long as there is a central bank, they get their salaries, speaking engagements, and consultant fees...

Tue, 10/07/2014 - 10:29 | 5298654 gcjohns1971
gcjohns1971's picture

Central banks are always fronts for commercial banks.

This is formalized in the US Fed.  But it is a practical reality for all central banks.

As such, it is desireable to the real banking interests behind the central banks if the CB absorbs the trash (effectively transfering it to the taxpayer) while the commercial bank absorbs the cash.

It is the sovereign debt purchasing mechanism, where the CB credits them with newly printed money in return for dealing the sovereign debt, that makes these banks wealthy - not interest on the currency.

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