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Why Are Primary Dealers Are Liquidating Corporate Bonds At An Unprecedented Pace
By now it is common knowledge that over the past two years the primary source of stock buying have been corporations themselves (recall Goldman's admission that "buybacks have been the largest source of overall US equity demand in recent years") with two consecutive years of near record stock repurchases. However, now that a December rate hike appears practically certain following the "pristine" October jobs report, suddenly the question is whether the recent strong flows into bond funds will continue, and generously fund ongoing repurchase activity.
The latest fund flow report from BofA puts this into perspective
The increase in interest rates is starting to impact US mutual fund and ETF flows. Hence, the inflow into the all fixed income category declined to +$0.96bn this past week (ending on October 4th) from a +$2.80bn inflow the week before... Outflows from government funds accelerated further to -$2.43bn this past week from -$1.73bn and -$1.00bn in the prior two weeks, respectively.
But more concerning for corporations than even fund flows, which will surely see even bigger outflows now that both yields are spreads are set to blow out making debt issuance far less attractive to corporations whose cash flows continue to deteriorate, is what the NY Fed reported as activity by Primary Dealer, i.e., the most connected, "smartest people in the room" who indirectly execute the Fed's actions in the public markets, in the most recent week.
As the charts below show, the Primary Dealers aren't waiting for the December announcement to express how they feel about their holdings of both Investment Grade and Junk Bond (mostly in the longer, 5-10Y, 10Y+ maturity buckets where duration risk is highest).
Indeed, as of the week ended October 28, Primary Dealer corporate holdings tumbled across both IG and HY, plunging to the lowest level in years in what can only be called a rapid liquidation of all duration risk.
Investment Grade Bonds:
And Junk Bonds:
Why would dealers be liquidating their corporate bond portfolios at such a fast pace?
For junk, the obvious answer is that with ongoing concerns around rising leverage, not to mention yields being dragged higher by the ongoing pain in the energy sector, this may be merely a proactive move ahead of even more selling.
But for IG the answer is less clear, and the selling likely suggests fears that any December rate hike will see spreads blow out even further, and as a result dealers are cutting their exposure ahead of December.
Whatever the answer keep a close eye on this series: if Dealer net positions turn negative it will mean that the corporate buyback door is about to slam shut in a hurry as others begin immitating the 'smartest and most connected traders in the room', depriving corporations of their biggest source of stok buyback "dry powder." In fact, taken to its extreme, if companies suddenly find it problematic to raise capital using debt, we may soon enter that phase of the corporate cycle best known by a spike in equity issuance, whose impact on stock price is just the opposite to that of buybacks.
Source: NY Fed
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Because the casino is about to crash???
Or maybe they know like the rest of us its already circling the drain and its time to get out..
Buy Icelandic Bonds. At least they jail Criminal Banksters
The BoJ and ECB better start printing again. They're the only ones stupid enough to by any new stock issuance when earnings are in the shitter and valuations are so high.
And who knows how much they're already holding, at that. Printing might be necessary just to preserve the asset prices on CB balance sheets.
Sure looks like a feedback loop to me, and not the good kind.
Damn.Sold it all.
Wheres the beef ?
I believe the better question is, who is the buyer (GS clients? Some guy in Brussels? The ETF's shilling the shit to your parents/kids/401k)
Also to add a little color to the 'sophistication' of the Primary Dealer list Feb 2, 2011 MF Global Inc. and SG Americas Securities, LLC have been added to the list of primary dealers, effective February 2, 2011. Revised Primary Dealers List ›› Oct 31, 2011 MF Global has been deleted from the list of primary dealers, effective October 31, 2011. Revised Primary Dealers List ››
I'll take "because they are worthless" for $1,000 Alex.
'Cause they were forewarned jobs report in some manner?
Who knows? And frankly right now I'm in the who fucking cares camp.
The Goddamned thing is irreparably broken.
Hold on for dear life.
i have to agree...who the fuck cares...caring only leads to ulcers. i prepped myself as best as possible and have a good assortment of dvd's and plenty of popcorn and booze. it is out of our hands as to what happens
They are not going to hike in December or for the next 5-10 years for that matter. This is a game. They are manipulating the markets and data to keep them propped up becasue they know what the real data is and the markets would tank if they told the truth. Remember what Obama said at the end of the last 60 minute interview, he is going to make sure GOP doesn't tank the economy in his last year. To him (and the fed he is manipulating with) the economy is the stock market. Lie about everything to keep it up. If they lose it, he's screwed. He wants to look better than Clinton so he will lie, cheat, manipulate and hope he can keep it propped until he's done. Bragging rights you know.
There is nothing we can see now or logically argue that they will stop them except for a black swan event that is not on anyone's radar. And if you don't believe me look at the last 7 years as he added $10 trillion to the national debt and plowed through every world issue that existed. He will not stop.
All that leverage that those bonds represent is sure as hell on the radar. A major bankruptcy or two is in order here. That's your "black swan," though it's not really a black swan. It will be labeled as such. "Oh, nobody could have forseenseen Such-And-Such Energy going bankrupt and jacking the corporate bond market up!" It's just a matter of when, and Obama is in over his head if he thinks that he can have more than minor influence on that, lest he actually direct the Justice Department to start putting bankers in jail. Now THAT would be a true black swan.
Because: everything is way, way awesome.
Fuck you, pay me!
Why does that graph show them dumping 20 TRILLION dollars of bonds?
Raising rates has become a party joke in most circles.
Chairman Yellen's staff is broken. She'll print and drive interest rates negative before she raises.
Are these liquidations by primary dealers exacerbating the perceived problem of loss of liquidity? If so, the dealers have no one to blame but themselves. But this liquidation also suggests that these folks are convinced that a collapse of the bond market is imminent and they don't want to get caught with their pants down. It is interesting that the current inventory of junk bonds appears to be slightly higher than investment grade. I guess those are bonds (from frackers, perhaps) that no one will buy no matter how low the price.