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The Hidden Message In High-Yield Credit Markets - Most Fearful Since Summer 2012
While everyone is watching the absolute spread levels of high-yield bonds (or their prices or all-in yields) as the recognition of broad-based default risk (contagiously carried over from bloated and levered energy firms) arrives at the mainstream. However, under the surface of the arcane world of credit derivative indices is 'the basis' - which measures the difference between the index level being traded and the implied level of the index based on the individual components. In English, the basis measures the relative demand for macro risk protection... and it's at its highest since the chaos of Summer 2012...
The high-yield credit market is flashing very red... (as the HYCDX 'basis' suggests managers demand for protection is very high)
While equity index products and their underlying components are arbitraged in almost infinitessimally small increments so that, for example, the S&P 500 ETF and the 500 components that 'trade' as its portolio are all kept in sync; in credit markets, due to differences in liquidity, technicals (flow), and demand, the index and its underlying components can (and do) trade apart.
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In the case of the High-Yield credit market, investors are willing to pay over 30bps more for protection than is 'fair' to ensure some liquidity and insure positions... this is an extreme amount of fear that is not priced in any other markets (yet).
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They don't call 'em junk bonds for no reason.
High yield spreads will continue to deteriorate despite the recent bond market rally. If the shit doesn't hit the fan, they could be a good play later in 2015. But I hope the shit hits the fan and makes a mess.
Psh
I think the key words here are SINCE 2012
Look how far the markets have come since 2012 last several years =>http://www.bit.ly/1fMcakI
Its astounding, and I would not be surprised if we get a HUGE RALLY in 2015, based on what has already happened. I konw there are lots of bears here on ZH, but
It Looksk and feels like they are planning something here, probably NOT TO RAISE interest rates. Imagine if they keep low rates for the next 12 - 24 months, I am not saying it WILL happen, but if they do that, the market will keep skidding up higher and higher.
Or maybe we call them Kardashians (KRDS) cuz dey jus "junk in da trunk".
Dunno about you guys, but I find this article significantly more interesting than another "when junk bonds go wrong" article. Introducing the all new vagina gun...Enjoy...
http://woodstermangotwood.blogspot.com/2015/01/vagina-gun-you-cant-make-...
I've been reading all the wrong blogs.
Now you tell me they can shoot back. Guess I am lucky so far it's just took the money
"Old houses will moulder and die."
Also, look at the trend, a steady and even rise upward.
I was getting excited until I read "since 2012." A year with another big market rally. So yawnnnn
people paid a lot for protection in MBS-laden CDOs a few years back, too.
But look - the Fed has been able to print more and for longer than a lot of people would have thought.
Apparently, all you need to do is give it to Goldman Sachs and a handful of banks, and keep it away from main street and small business, and all your numbers can look great, shadow inflation is higher than reported but not too bad, and people like krugman can call for MOAR and not be fired for weapons grade stupidity.
So how much longer can the plates be kept spinning? We're looking for wobble.... wobble is entropy growing at an accelerating rate.
Physics beats economics, every time.
I don't claim to be Nostradamus - but I think we're looking at less than 1 month for quite seroious down-valuations across everything, dfollowed by war in europe.
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06 JANUARY 2015
What 2000, 2008 and 2015 May Have In Common
'As a dog returns to its vomit, so the fool repeats their folly.'
Proverbs 26:11
jca
http://jessescrossroadscafe.blogspot.com/2015/01/what-2000-2008-and-2015...
Oil prices/correlation risk created a great buying opportunity for HY cash. Synthetic HY is used as a hedge for all kinds of securitized instruments for lack of anything better, as well as cash bonds. This explains the 30 bps basis.