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Yuan Devaluation Sparks Biggest Crash In US Corporate Bonds Since Lehman
Just two days ago we warned of the dramatic disconnect between equity insurance and credit insurance markets - at levels last seen before Bear Stearns collapse. As the Yuan devaluation shuddered EURCNH carry traders and battered European assets, US equity markets stumbled onwards and upwards, impregnable in their fortitude with The Fed at their back no matter what. However, US corporate bond markets were a bloodbath...
The Bank of America/Merrill Lynch High Yield CCC Yield got absolutely slammed this week, rising from 13.58% to 16.18%! The biggest spike in yields since the financial crisis.
That would suggest, as all listed above, that there has been inordinate and tremendous “dollar” pressure not in foreign, irrelevant locales but creeping into the contours of the domestic and internal framework.
And while the junkiest of the junk saw the biggest decompression since Lehman, the rest of the high yield bond market is also starting to catch the credit cold..
Of course, some of this is energy related which has blown wider to record wides... (once again equity just totally ignoring the carnage)...
But it's not all energy.
And as we noted previously, BofA points out that in just the past two weeks, credit spreads from our HG corporate bond index have widened another 9bps to 164bps while equity volatility is down another percentage point (although technically BofA uses the 3rd VIX futures as its measure of equity volatility rather than VIX itself to get a smoother series that is less affected by the daily noises and seasonalities).
This is how the resulting dramatic divergence looks like:
Why is this notable?
In BofA's own words: "this spread currently translates into 10.26 bps of credit spread per point of equity vol, the level reached on March 6, 2008 – ten days before Bear Stearns was forced to sell itself to JP Morgan for $2/sh. Recall that – unlike the credit market – the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis."
In other words: unprecedented equity complacency matched by a state of near bond market panic.
BofA's conclusion:
The key reason for this weakness is that our market has transitioned from “too much money chasing too few bonds” to “too many bonds chasing too little money”. That shift is motivated by the impending Fed rate hiking cycle as issuance, M&A and other shareholder friendly activity has been accelerated while at the same time demand has declined. Again, we are not trying to predict a crisis – only to point out that the upcoming rate hiking cycle appears to concern issuers and investors so much that they have been taking real actions that have repriced our market lower relative to equities to an extent that we have only seen during the financial crisis.
We can't wait to find if this is the first time in the history of capital markets when it is stocks that are right, and bonds wrong.
And as Alhambra's Jeffrey Snider concluded rather ominously,
The cumulative assessment of all these factors, great as they are in their individuality, is that the global financial system just endured this week another “dollar” run. We can say with some reasonable assurance there was one in early December, as well as one centered on October 15.
They seem to be increasing in intensity and now reach, penetrating deeper into the bowels of the “dollar” system as well as taking down central banks with each successive wave.
We have, of course, seen this picture before (most egregiously in 2007/8) and as Bloomberg calculates over 70% of the time since 1996, as spreads widened as much as they have since April, the S&P 500 has fallen, with the average decline exceeding 10%.
History may not repeat but it sure does rhyme...
Charts: Bloomberg, Alhambra Investment Partners
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The FED's gonna need some pretty strong thread to close up those gaps.
"Since Lehman" Holy Fuck.....
The FED, BIS central banking chosens have been making the market 100% since Lehman.
Bubblegum wont hold on lug nuts.
RIPS
The Lehman debacle will be soon be forgotten and replaced with something worse, but of course, it'll be a complete surprise.....
Not another #worstsincelehman.
Well, it seems that something is brewing . . .
https://research.stlouisfed.org/fred2/graph/?g=1DC3
https://research.stlouisfed.org/fred2/graph/?g=1DC4
SINCE LEHMAN !!!
Made my day
Thanks for the most excellent charts dude!
ZH loves to cite Jeff Gundlach when it suits Tyler's purposes. Perhaps he (they) should look up the article from Friday's Bloomberg in which Gundlach says he's buying investment grade debt here.
So ZH readers. Who do you think is right here? Tyler or Gundlach?
At least when the stock and bonds markets detonate, they leave only a financial blast crater with no poisons like sodium cyanide all over the place, unlike Tianjin. So your investments (representing green stuff, money) may vaporize but the process is very green, environmentally friendly.
Optimist....
Bear Stearns sold for $10 per share NOT the $2 that Paulson had suggested. Moreover, few, if any, correct this incorrect number.
And it was a smoking crater not worth either valuation.
Four weeks to the next FOMC meeting. Tick-tock...
My glass is half full after seeing the last chart.
The blue hashed line could have just as justifiably been drawn through the middle or end of 2006 for an apples-to-apples comparison (i.e., shift the top half of the chart to the left a bit).
One could argue that the chart is apples to apples as is. In both cases credit and equities diverged for approximately a year leading up to the blue hashed line.
It's almost poetic to watch it collapse one day at a time, brick by brick.
Sell everything unless you trust central bankers.
Arrest them now before they get away.
I smell a popcorn week
Perhaps high yield - but investment grade not so much.
DOCTOR: Clevon is lucky to be alive. He attempted to jump a jetski from a lake into a swimming pool and impaled his crotch on an iron gate. But, thanks to recent advances in stem cell research and the fine work of Doctors Crenski and Ottschuler Clevon should regain full reproductive function.
Clevon: GET YOUR HANDS OFF MY JUNK! [/idiocracy]
China's devaluation was as good as a rate hike.
“too much money chasing too few bonds” to “too many bonds chasing too little money”.
Close. It's too much credit-money chasing an ever more worthless economy because both energy consumption and (consumer/business) credit creation are unable to grow at an acceptable cost. The dollar is becoming hard currency, and thus being hoarded out of a system that is worth less by the day.
Those are alligator jaws, just waiting to snap shut.
The Chinks aren't finished screwing the US yet.
You know, they may not have even started.
A lot of KY was blown up in Tianjing
Knightian uncertainty, bitchez!
Knight was an insane neocon hack that exemplified the worst of the monetarists... And never saw the great depression coming
I keep looking around and all I can see is an increasing amount of junk. Junk bonds, junk food, junk government debt, junk malls with junk stock, junk education, junk health, junk politicians, junk money, junk jobs, junk houses, junk entertainment etc.
The net result is fast becoming junk people with junk values amd therefore junk outcomes.
And all done by design....
You're right. I forgot to mention DESIGNER junk.
Nothing can earn a return, including debt, soft currencies, trade, commerce, and labor. You cannot wish energy into existence.
If you're lucky, hunting, foraging, and some form of farming can maintain a calorie surplus, which is the only kind of return that ever mattered.
The desperation is palpable and growing exponentially.
nicely put....and junk presidents who now run in Jong Il style families swaping power every few years. No doubt Michelle Obama will be up in a few years. We Brits are amazed the American people put up with this parlour trick, its inconceivable in Britain.
Who needs credit "quality"?
It's all about "quantity" as in "quantitative easing", not "qualitative easing".
Get out the old bazooka and make it a ten-trillion caliber and watch those spreads compress!
The low-quality high-quantity economy
"Quantity has a Quality all of its own." - Naploeon
Oh, Oh, I sense another Israeli/Rothschild "Micro-Nuke" going-off in China. Real soon....
Will that be before or after the nuclear explosion out of a Sabrett hot dog cart at Wall and Broad?
I'd like to know so I can load up on Polish sausages in advance.
Thanks.
"Since Lehman" - whew, I can breath again - everything is back to normal. Thanks, I needed that.
I suspected as much.
So there was method in their madness.
And their market crash. And the suspended trading of many of their stocks. And many devaluations.
Was it all to repay the West for The Hundred Years of Humiliation?
Or did they just do it 'cause they could?
We're gonna need a bigger boat!