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The Worst Case Scenario For Bond Bears According To JPM: Rising Stock Prices

Tyler Durden's picture




 

We have previously discussed the massive, and getting bigger, Treasury supply/demand imbalance as we head into 2015, when none other than the ECB is expected to join the monetization fray alongside the BOJ, and as we previously reported using a Goldman analysis, while the BOJ is expected to monetize some 100% of all gross Japanese issuance, the ECB will buy some 90% of all Bunds Germany has to issue in 2015, as well as hundreds of billions in other European public debt.

So here comes JPM with its own even more startling analysis which finds that total central bank monetization of soverign debt will increase from $1.0 trillion in 2014 (between the Fed and the BOJ) to $1.3 trillion (between the BOJ and the ECB). Why? Recall Citi's analysis from October that "It Costs Central Banks $200 Billion Per Quarter To Avoid A Market Crash."

The fact that bond yields declined, credit spreads widened and the dollar rose over the past year demonstrates how atypical the current monetary policy cycle has been relative to previous cycles.

 

This atypical behaviour can be partly explained by the offset that the ECB and the BoJ provide to the Fed's tapering. Based on our revised call about sovereign QE by the ECB, we project that G4 central banks will purchase more bonds in 2015 than last year. We expect the ECB and the BoJ together to purchase $1.3tr of bonds this year relative to the $1.0tr that last year was bought by the Fed and the BoJ. And this is having a dramatic on global bond demand and supply. In our Nov 14th 2014 F&L report, we projected that the balance between supply and demand, i.e. excess supply, will widen from -$485bn in 2014 to -$412bn in 2015. But our revised call about sovereign QE by the ECB implies $200bn more of bond purchases and thus a balance between bond supply and demand that is closer to -$600bn for 2015, i.e. even more negative than last year. In other words, the demand/ supply backdrop is even more likely to remain supportive of bond markets this year. On our calculations, the balance between bond demand and supply has been supportive of bond markets during most of the post Lehman period years with the exception of 2010 and 2013. The wildcards of our bond demand/supply analysis are our estimates of bond fund demand by retail investors, the bond buying by commercial banks, the supply of spread product in Europe and the speed of asset allocation changes by GPIF.

None of this is news, and certainly not to anyone who read "Desperately Seeking $11.2 Trillion In Collateral", but for those still calling for soaring bond yields now that there is a "recovery", here is a hint: the frontrunning of central banks means there is $600 billion more demand than supply in 2015. It does not take rocket surgery to figure out what this unprecedented excess global Treasury demand means for bond, aka scarce "High Quality Collateral", prices.

Yet one thing which JPM did note to our surprise and which is sure to lead to yet another bloodbath for the momentum-chasing, levered beta entities formerly known as hedge funds, and who - in their complete lack of creativity - have once again put on the long S&P, short 10 Year pair trade on hoping that this is the year, is the following:

... US pension funds and insurance companies stepped up their bond buying during the mid two quarters of the year. The equity allocation [of US pension funds and insurance companies] had gone up and their bond allocation down by so much over the previous two years that they had to increase their bond purchases to stop their bond weightings from moving even lower. In a way, the more equity prices go up the higher the pressure on US pension funds and insurance companies to buy more bonds. For example, assuming equity prices rise by 10% this year, for their bond allocation to stay at 37% (same as of Q3 2014), US pension funds and insurance companies would have to buy $550bn of bonds in 2015.

And that's a half a trillion in additional purchases just out of static reasons, i.e., to keep allocations flat. If asset managers decide that "bond kings" like Gundlach are correct, and that bonds will generate better returns than stocks for the second year in a row, and decide to actively raise the bond allocation above 37%, then all demand bets are off.

However, even absent that scenario, the paradox emerges: another 10% increase in the S&P, something which is roughly in line with where the consensus sees the S&P500 saying goodbye to 2015 and the bond market is suddenly subject to a historic imbalance of as much as $1 trillion in excess demand, as a result of both portfolio allocation and central bank buying!

Said otherwise, the biggest threat to bond bears and everyone else who is short the long end, is precisely the very signal that said bears have misinterpreted as being the catalyst for the long-awaited bond market selloff: rising stock prices.

And then there is the flipside: if 2015 is the year when the inevitable 3rd consecutive bubble (after the 2001 dot com and the 2007 housing bubble) finally pops, which way will bonds trade then, or will this time be different and a wholesale stock market crash finally also result in a parallel dumping of bonds? If so, just what long-despised asset class will the algos end up having no choice but to buy then?

 

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Sun, 01/04/2015 - 15:44 | 5621075 Son of Loki
Son of Loki's picture

Well, at least we know the muni penison funds are solid.

 

/sarc

Sun, 01/04/2015 - 15:47 | 5621079 Oracle 911
Oracle 911's picture

JP Morgue made a sick joke on our expense.

Sun, 01/04/2015 - 15:52 | 5621089 Tall Tom
Tall Tom's picture

Not as sick as the joke which resides at Fucking Little Girls-and Ham Palace...

Sun, 01/04/2015 - 16:30 | 5621167 Save_America1st
Save_America1st's picture

"If so, just what long-despised asset class will the algos end up having no choice but to buy then?"

 

GOT PHYZZ??? ;-)

Tick...tock, bitchez...

 

Off Topic:

RIP Stuart Scott

http://espn.go.com/espn/story/_/id/12118296/stuart-scott-espn-anchor-dies-age-49

Sun, 01/04/2015 - 16:49 | 5621221 MalteseFalcon
MalteseFalcon's picture

So Meredith Whitney said Munis were going to blow up, what, 4 years ago?

WRONG.

Sun, 01/04/2015 - 16:52 | 5621233 MalteseFalcon
MalteseFalcon's picture

Yields are going down, same as every year and bonds are going up.

Who needs stocks?

Sun, 01/04/2015 - 16:54 | 5621247 MalteseFalcon
MalteseFalcon's picture

Bond bears?

Try bond bear rugs.

Yeah, some day you may be right.

I'll be sure to etch it on your gravestone.

Sun, 01/04/2015 - 16:58 | 5621256 MalteseFalcon
MalteseFalcon's picture

Hey, has the SS DI fund run out, yet?

No.  No, it hasn't.

Sun, 01/04/2015 - 17:01 | 5621262 MalteseFalcon
MalteseFalcon's picture

So oil is on it's way to $30 / barrel where it's going to stay for a good long while.

 

Any thoughts on how to trade cratering oil?

Sun, 01/04/2015 - 17:09 | 5621286 Save_America1st
Save_America1st's picture

"Any thoughts on how to trade cratering oil?"

 

yeah...buy phyzz silver now and stash it away. 

There is no market...stay out of it. 

Sun, 01/04/2015 - 18:03 | 5621426 MalteseFalcon
MalteseFalcon's picture

LOL. Looking for a winner this decade.

Haven't you "phyzz guys" had your asses completely kicked in, yet?

Sun, 01/04/2015 - 19:35 | 5621712 falak pema
falak pema's picture

yes : call it abiotic and the crater becomes a spring.

Sun, 01/04/2015 - 19:04 | 5621624 Greenskeeper_Carl
Greenskeeper_Carl's picture

I'm confused. This article is predicting massive ECB QE this year, soaking up EU sovereign bonds, but an earlier article predicted the long awaited(inevitable) Grexit, which would destroy the EUs ability to conduct QE. Which one is it?

Sun, 01/04/2015 - 16:09 | 5621126 Stoploss
Stoploss's picture

But, but everyone says yeilds are going up, even 'Ol Yellen...

Where will the repo's come from?????????????????????????

Sun, 01/04/2015 - 16:21 | 5621150 SAT 800
SAT 800's picture

a.) Stock prices aren't going to rise 10% this year; cause this is the year of the "great correction" (crash). b.) J.P. Morgan &cie. are lying; in an attempt to deceive the investing public. (they've been doing this since 1907, that we know of).  And all of this is IMHO; which is worthless.

Sun, 01/04/2015 - 15:56 | 5621096 LawsofPhysics
LawsofPhysics's picture

It really is silly to talk about prices in the absence of any price discovery.  Jamie has access to where the "money" is printed and he knows who prints it.  That is why he is "richer than you".

Sun, 01/04/2015 - 16:23 | 5621153 disabledvet
disabledvet's picture

So it is funny that no less than Wall Street's preeminent bank wants to advertise how stupid they are. Don't get me wrong...love JPM...but this is just dumb. "As equities surge higher they will take the dollar higher with that rise this making any form of arbitrage harder." At least I think that is what the textbook said back in the day.

I'm still long treasuries but still not bullish on them. As equities and now the dollar soar I'm suppose to be short treasuries? This is AFTER oil prices have collapsed?

I just think these folks have no clue what they're talking about. Should I be worried about JPM's stock price as a consequence?

Sun, 01/04/2015 - 16:38 | 5621186 weburke
weburke's picture

"Smart money will sit in short-term bonds until interest rates suddenly leap, surprising "everyone," at which point they will shift into long bonds to lock in high returns. The other trade will be in commodities--but only after prices are smashed by the crash of demand as the global economy enters the Depression which was temporarily delayed by a gargantuan (and unsustainable) surge of sovereign and corporate debt."

Sun, 01/04/2015 - 16:01 | 5621105 kowalli
kowalli's picture

I hope we will hang this guys, they are killing all world.

Sun, 01/04/2015 - 16:04 | 5621112 Hubbs
Hubbs's picture

The markets are  like a formerly repected spouse (at least by public appearances) who  has suddenly and openly started having public affairs. Everyone knows she/he is a slut/philanderer, but no one cares. As long as they invite people to their parties etc, the public treats them the same.

 

It's also like the Geico commercial: Do you know that  for just 15 minutes, The FED can save the Banks 100 billion dollars?

Everyone knows that....etc.

It is no secret now that Wall Street is corrupt. But everyone is in a sort of Nash equilibrium, whereby no one will change his behavior as long as he perceives the other party is not going to change theirs. The ultimate in game theory.

Sun, 01/04/2015 - 16:13 | 5621136 LawsofPhysics
LawsofPhysics's picture

...right up until real goods and services cannot be delivered.

This is not a new situation for humanity to be in either.  It will end the same way it did last time.

Sun, 01/04/2015 - 16:52 | 5621237 cnmcdee
cnmcdee's picture

So the game ends when she stops giving everybody blow jobs..

Sun, 01/04/2015 - 16:08 | 5621117 buzzsaw99
buzzsaw99's picture

i lol at t-bond shorters. they are going to get it good and hard no matter what happens.

Sun, 01/04/2015 - 16:10 | 5621127 i_call_you_my_base
i_call_you_my_base's picture

It is pretty funny.

Sun, 01/04/2015 - 16:07 | 5621118 Black Forest
Black Forest's picture

"If so, just what long-despised asset class will the algos end up having now choice but to buy then?"

Dutch tulips, I guess.

Sun, 01/04/2015 - 16:34 | 5621176 SAT 800
SAT 800's picture

There's more to t he trading world than algo's; there's still a lot of people trading; and IMHO, (which is worthless), some of this "distressed cash" is going t o find a home in Precious Metals. I'm looking to a significant bull market in the Metals t his year. And yes, I already know I'm crazy, so don't bother pointing it out. Meanwhile, my "Low for the year 2014-15" in Silver, $15.50 remains untouched by the market; or whatever this is. So There. But you get to laugh after it crashes down below there; but not before, okay? Good.

Sun, 01/04/2015 - 17:51 | 5621413 daveO
daveO's picture

Gold will be probably be nearer $1000/oz. by April Fool's Day. Then retest in June. I have some, and want more, but that won't stop it from falling. If Rikards is right, FED QE won't restart until about Jan. 2016, so a June bottom makes the most sense to me. 

Sun, 01/04/2015 - 21:36 | 5622049 new game
new game's picture

they all go down including interest rates. stawks, pm, grains with oil leading the way. year of reset/deflation the cb's can not contain. debt jig is up. cat is out of the bag, no moar quality assets to collaterize w/o further dillution. fucking fucked i say- fuse  burns; tic toc.

Sun, 01/04/2015 - 16:14 | 5621138 kowalli
kowalli's picture

Simple - Central banks buy assets with our money and make owners of this assets more rich. Rich guys gets more richer with our money.

Sun, 01/04/2015 - 16:16 | 5621140 Possible Impact
Possible Impact's picture

Which way to WonderLand?

http://www.youtube.com/watch?v=WANNqr-vcx0

Jefferson Airplane -White Rabbit-

"Go ask Alice..."

Sun, 01/04/2015 - 16:39 | 5621191 SAT 800
SAT 800's picture

Well, I've taken quite a few of those pills that my Mother never gave me; so maybe my opinion is as good as Alice's ? Naw, that couldn't be. Maintaining my staunchly reasoned "gut feeling" that a.) the stawks are going down, and b.) the Precious Metals are going up; this year. Surely, Alice couldn't come up with anything crazier than that ?

Sun, 01/04/2015 - 16:23 | 5621145 Hubbs
Hubbs's picture

Sounds like Washington is making sacrificial lambs out of Japan and Europe, knowing that by Europe and Japan printing more, that will keep the US dollar afloat as the final safe haven.

 

When US (Bernanke) started printing first before Europe and Japan , there wasn't as much potential impact. But now things may be changing.

 

Japan and Europe... how does it feel to be screwed?

 

Sun, 01/04/2015 - 16:23 | 5621155 Sudden Debt
Sudden Debt's picture

It’s not exactly the entire story but it’s the entire weimar story that is simply repeating itself.

governments buy all the bonds with printed money, banks buy the stocks to insane prices, people invest in assets, assets go to insane prices and poof: hyperinflation within 3 years from now.

And you  an’t reverse this process anymore because people go for the higher profit and when assets run wild there’s no way to stop that bubble.

They’ll try off course with price controls and guideline prices and maybe they’ll be the first once in history to pull that one off but I wouldn’t bank on it.

so:

Food, energy, gold and silver: will be the next bubble in the next 3 years and they’re all freaking cheap right now.

Just dont play them with options, buy the etf’s directly because that will ffect the futures markets and will make it unprofitable for the option traders as they’ll be priced way to high.

Sun, 01/04/2015 - 16:42 | 5621201 papaswamp
papaswamp's picture

Red pill...blue pill....

Sun, 01/04/2015 - 18:39 | 5621548 winchester
winchester's picture

i choose white pill, aspirin one,

coz TEOTWAWKI take fucking age to get done

Mon, 01/05/2015 - 03:15 | 5622712 noben
noben's picture

The pics of several victims appear in both obituaries.

This calls for some real investigate journalists to verify, and blow the whistle.

Sun, 01/04/2015 - 16:26 | 5621160 papaswamp
papaswamp's picture

Stock price rise is called inflation. It was the only place the Feds inflation plan landed...and it is way out of control. Problem is...its not recognized as out of control inflation. Too late......

Sun, 01/04/2015 - 16:27 | 5621162 Barnaby
Barnaby's picture

No, the worst scenario is getting beyond 8 billion humans. Penis will ensue, believe me. After all, humans are simply animals, and some are more human than others. #peakhuman

Sun, 01/04/2015 - 16:41 | 5621198 papaswamp
papaswamp's picture

Agreed this is the ultimate problem, though wont be recognized as such for another 10-20 yrs.. Fortunately, human population has almost peaked...developed countries have already peaked or are at near peak. ( ex Japan, parts of EU and Russia). War is one of the few population controls left....until someone unleases something more ' stringent'.

Sun, 01/04/2015 - 16:49 | 5621225 logicalman
logicalman's picture

It looks like EVEYTHING is a Ponzi based pile of crap.

The bankster/politician crime syndicate need more and more people to tax to death and to keep the charade alive.

In 1950, there were 7.2 people aged 20–64 for every person of 65 or over in the OECD countries. By 1980, the support ratio dropped to 5.1 and by 2010 it was 4.1, and that's WITH the increases in population over those year.

Just think what is going to happen when the population starts to decline!

I think we may be in for some very unpleasant forms of 'population control' in the not too distant future.

Sun, 01/04/2015 - 19:33 | 5621702 falak pema
falak pema's picture

the Natashas need to breed. Putin should go long on penis butter! That is better than Amerikan Peanut butter!

For babies ! 

Sun, 01/04/2015 - 16:49 | 5621222 cnmcdee
cnmcdee's picture

I have a question for the zerohedge writers / readers.

On page 131 of the GAO report from 2001 it stated that Citibank was leant $2.5 TRILLION dollars but wikipedia reports they were only leant $25 billion in a credit line and $45 billion.

GAO report 

http://www.sanders.senate.gov/imo/media/doc/GAO%20Fed%20Investigation.pdf

Wikipedia 

http://en.wikipedia.org/wiki/Citigroup

The descrepancy is like 100:1 anyone know what that is about? 

Sun, 01/04/2015 - 23:15 | 5622335 NIETSNEREM
NIETSNEREM's picture

Could very well be in their overnight and term discount window borrowings.

Sun, 01/04/2015 - 16:53 | 5621239 alexmark2013
Sun, 01/04/2015 - 17:02 | 5621264 One And Only
One And Only's picture

There is one axiom I've never understood when it comes to free market participants (I consider myself a free market participant). 

The word "manipulation" has always really confused me when it comes to this cacophony of general market discussion regarding pricing/manipulation/fair value. 

Some people say: let the market find the fair value, a relationship that should be conducted between buyers and sellers. 

The FED and all other Central Banks are market participants (they buy/sell like everyone else - albeit without risk). Central Banks have an unfair advantage without question...they have currency reserves that can really just be printed ad infinitum. They have no official audits and that's just the way it is. But they are market participants. 

For every cause there is an effect. By propping up real-estate some people are doing widely successfully. The prices of homes have started to go up. That's great for Private Equity and Hedge Funds who can essentially become slum lords. 

If you want people to buy homes prices need to come down. 

The US NEEDS deflation....if the goal is to get people into homes. 

Sun, 01/04/2015 - 17:13 | 5621306 tok1
tok1's picture

The consensus is for lower yields ( this is the 10th article I have read
of a bank or bond fund saying they think yields will come down / remain low
( and their against consensus ).. Non bond trading analyst on CNBC have expected higher yields but the large funds trading are long and expecting lower or stable yields. Higher rates would be the surprise . Maybe after ECB QE.

Sun, 01/04/2015 - 19:29 | 5621671 falak pema
falak pema's picture

I've always said that the level to which stocks have risen and the depths to which bond interest rates have fallen; although coherent in theory, reflect a REALITY where moral hazard is now deemed irrelevent.

So, the day moral hazard gets back its teeth like the soldiers of Colchis, our friend Jason the banksta, robbing the golden fleece, will have to run and run hard, taking back with him a Sorceress : Medea. 

And that is when the Vampire's ball of Ws argonauts begins. You'd think that old Argos had taught these guys to row straight. 

Think again. Witch's brew !

Sun, 01/04/2015 - 19:31 | 5621700 razorthin
razorthin's picture

Really?  That's the worst case scenario?

Mon, 01/05/2015 - 02:57 | 5622697 theyjustcantstop
theyjustcantstop's picture

pension funds, and ins. co.'s aren't going to change their equity, bond purchase allotments by what jpm says.

this is decided by boards, who have fuduciary responsibilties.

i'm sure the fund managers have told the boards already, there's no sense in changing the allotments, we can't truely tell you whats going to happen, unless your going to buy something more tangible.

there's going to be only one good thing happen in the crash, people are going to be mad as hell, and want to know why this happened, the fund managers are going to say where did all this liquidty come from, and where did it go, it's almost like there was no real money buying all these markets.

two days later congress passes, by the slimest of margins a audit the fed. legislation.

i know dream on.

 

Mon, 01/05/2015 - 06:57 | 5622894 tok1
tok1's picture

the end of QE  will come when pension funds go bankrupt.. ie Japan they still have 35-50% in JGB. The 5y is 0.025 (2.5bps)  7ys are 0.07 (7bps)  .  They are net having redemptions  how can they survive on 5-7ys of basically no interest on 1/2 their portfolio as the roll old bonds over. So it will be either the Govt restructures or the pension funds/ lifers go under (and liquidate by force at some point)... 

sub 10bp to negative returns dont work for funds that have obligations to pay out over long periods.. the Govt is trapped..

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