The Junk Bond Heatmap Has Not Been This Red In A Long Time

It has been a tough year for equity investors: nearly seven months in and the S&P 500 has been caught in what may be its narrowest trading range in history, fluctuating between unchanged and up 4% for the year for the past 6 months (which is not unexpected for those who have said the only thing that matters for the US market is the growth, or lack thereof, of the Fed's balance sheet).

But while stock investors have nothing to write home about, and even less to expect in year-end bonuses (at least until Yellen inevitably launches QE4), for junk debt investors, especially those still holding energy bonds, the last 8 months has been a horrific roller coaster as can be seen on the chart below, which shows that energy credit spreads are once again on the verge of blowing out through 1000 bps.

But for those equity investors caught in the artificial glare of the goalseeked stock market to appreciate how truly ugly it has gotten in the junk bond space, here is a heat map showing the YTD change in junk bond prices (relative box size indicates total outstanding debt amount) when seen in terms of either the 31 subsectors.

... or the 805 issuer companies that make up Citi's junk bond tracking universe.

At some point, investors (using other people's money) will tire of throwing good money after bad hoping to time the bottom tick in oil just right (and if oil tumbles in the $30, that may be just that moment) at which point the commodity capitulation which we noted previously, will spread away from just commodities and junk bonds, and spread to all sectors and products, including stocks. We can only hope this does not coincide with the Fed's increasingly more amusing desire to rate hike imminently.

Comments

[The Delicate Genius]

Well - it is Tisha B'Av, after all...

[buzzsaw99]

fidelity will buy them

[Paveway IV]

[ed: I should really mark this off-topic, because it's not about risky junk bonds, but 'safe' Puerto Rican munis]

DEFAULT NEARS: UBS’S PUERTO RICO BOND FUNDS IMPLODE, “COLLATERAL VALUE” DROPS TO ZERO, INVESTORS SCREWED

BlackListed News from Wolf Street

UBS sent out a letter to its clients on July 13, and at least one of those incensed recipients must have leaked a copy to Reuters. In this letter, UBS said that it “will also reduce to zero the collateral value assigned to all Puerto Rico closed-end funds shares.”

To zero!

Hey, on a long enough time-line,..  But what if your broker encouraged you to buy these on margin?

Clients were warned that they can no longer use these funds as collateral for loans, even those loans they used to buy these funds with in the first place.

That’s how risky UBS thinks these bond funds are. But UBS sets the value of these funds, and for now, they still have “value,” at least on its website, according to Reuters: “For example, one of the riskiest funds was worth $3.46 per share as of Thursday….”

By having the collateral value of their bond funds cut to zero, these clients are looking at a potentially grim situation:

Jeffrey Sonn, a lawyer in Florida, who represents some of the investors, told Reuters that UBS might liquidate the assets of clients who used these Puerto Rico bond funds as collateral for loans and might even take legal actions against them if they fail to produce additional collateral to replace the funds.

[Arnold]

Nice, thanks.

[blown income]

Let it blow...

[KnuckleDragger-X]

The suck is running deep and wide and while energy is in the lead, other players are circling the toilet too. Also, don't forget the knock-on effects into other industries, things could get ugly , fast......

[Carpenter1]

Everyone in the boat yet?

"OK NOW!"

[johngaltfla]

Boom! Goes the dynamite...

[debtor of last ...]

Ninja bonds are great, it's a hedge against samurai bonds.

[B2u]

The FED needs to hike rates.  Low rates have caused companies to buy back stocks rather than look for organic growth.  Until this "punch bowl" is removed, CEOs will continue pushing the stock price for their short term benefit.

[Silversinner]

The fed should not hike rates,the fed must be abolished.

Let the free markets determine interest rates.

[Herodotus]

QE4 will give these bonds new life.....for a while.

[Fuku Ben]

I will focus on some of the relationships to these events on a strategic level and their potential in the current likely financial outcome. Here the highlights are Junk Bonds & Derivatives. For those that may want to dig further I am noting some additional items you may want to research.

1. There are increasing numbers of indicators showing the eventual direction of the financial markets each day.

4. The interconnected marketplaces significantly increase the risk of this being a major global event and the potential for one major e vent to trigger a global crash.

http://www.zerohedge.com/news/2015-07-21/smart-money-used-last-weeks-mar...

_______________________________________________________
Junk Bonds - Michael Milken now of the Milken Institute among other things. See link below from yesterday. You may also want to look up 1987 Market Crash in relation to this too.

http://www.zerohedge.com/news/2015-07-23/world-economy-visualized#commen...

________________________________________________________

Derivatives & Junk Bonds - Possible Research Topics: Rehypothecation, Co-mingling Assets, MF Global, Derivative Contracts

http://www.zerohedge.com/news/2015-07-23/world-economy-visualized#commen...

http://www.forbes.com/sites/greatspeculations/2014/10/16/watch-junk-bond...

_________________________________________________________
Junk Bonds & Energy Funding & the Increasing Possibility of Far Greater Effects

http://www.zerohedge.com/news/2015-07-23/strategic-petroleum-reserve-no-...

Important quotes to note.

ZH - "At some point, investors (using other people's money) will tire of throwing good money after bad hoping to time the bottom tick in oil just right (and if oil tumbles in the $30, that may be just that moment) at which point the commodity capitulation which we noted previously, will spread away from just commodities and junk bonds, and spread to all sectors and products, including stocks." - July 25, 2015

FB - Potential new sources of existing financing will also dry up or vanish as they are squeezed into more conservative investments in order to not lose principal. - July 23, 2015

[Paveway IV]

Thanks for the links, but does anybody really need convincing, anymore? 

It's like waiting for the next of a thousand shoes ready to drop.

Pick one - ANY one. This whole Ponzi blows when the first one hits the ground. The collapse will be epic.

[Fuku Ben]

Thanks for the question. More need convincing than we can imagine. Most comments here seem to have quite a bit of knowledge and realization of what will happen.

View counts though are exceedingly high vs. comment count. I've seen 80k+ views on 25 comments. So I don't assume any set level of knowledge or understanding. Plus when you've worked at all levels, from cleaning toilets for a living all the way up to the board room, you can't help but have a greater appreciation and sense of responsibility to include everyone. Well at least I can't help it.

Headers, which didn't load on my last post but are now updated, should make it easier to pick out what interests each reader on my longer posts. Comment length will vary. I'll be doing more short posts like this one. I prefer the executive summary versions myself. Even on those I do my best include something for everyone.

[Arnold]

Some are talking the talk,

some are walking the walk,

most are not talking but gathering,

some are gathering, but not talking.

[Omega_Man]

I hope the crash is short and sweet like in '87 so I can buy some firms with some QE... should be like a yo yo... We'll all be trillionAires...

reminds me a of a joke we had while travelling in Ukraine some years ago.... one guys says... I'm a millionaire............ in  Hryvnia…

We’ll all be rich soon. 

[Chad_the_short_...]

OAS and WLL to zero

[Model T]

Fixed income market is built-in unstable / positive feedback will manifest / articles describing low liquidity, and wide distribution; ie; "weak hands"; further indicate fragility. Mr. Armstrong believes some sector of the Bond Market will go to all sell / no bid / later this year. It seems as likely a cracking point as any other. Perhaps more likely than any other. This type of debacle will be a cash is king type of scenario.

[Implicit simplicit]

Eventually,even though the quant easing, becomes the quant sneasing as the apparent immunity to any true correction falters. They are full of shit, which do you think will be chosen-QE4, tightening, or both? Paradoxical conundrum wrapped in a sad iroiny outcome 

[aliki]

HYG been sub-90 for its 2^nd week. if this continues., the credit analysts are going to have no choice but to start waiving the yellow & red flags. otherwise, its gonna be like the analyst who waited until today to downgrade on BIIB.