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"Nothing Makes Sense Anymore" Traders Fear Debt Market Distortions Signal "Something Big Is Brewing"

Tyler Durden's picture




 

In the last few months we have warned of the "perversions" in US money markets (here, here, and most recently here) adding that "to ignore them at your own peril." And now, as Bloomberg reports, it appears the mainstream is beginning to recognize that something very strange is going on in debt markets. Across developed markets, the conventional relationship between ('risk-free') government debt and other 'more risky' assets has been turned upside-down. "Everybody in the fixed-income market should care about this," warns a rates strategist and in fact, it’s hard to overstate how illogical it is when swap spreads are inverted, as JPM warns the moves in swap-spreads "should be viewed as symptomatic of deeper problems."

As we stated before, a negative swap spread holds no interpretative meaning, the very fact of which is the most important element.

In other words, we don’t have to figure out what the “market” is saying about a negative spread because it isn’t saying anything other than “something” is wrong (and very wrong with so many and deeper negative and compressed maturities).

 

 

There are numerous reasons for this "nonsense" - as we detailed here, and as Bloomberg adds,

“These kinds of dislocations can be expected to grow over time,” said Aaron Kohli, a fixed-income strategist at Bank of Montreal, one of 22 primary dealers that trade directly with the Fed. “The market structure and regulatory structure has evolved in a period with very low volatility. Once you take that away, it’s not clear what the secondary implications of that will be.”

 

...

 

As the phenomenon becomes more widespread, it adds to evidence that it’s not just a one-off, according to Priya Misra, the New York-based head of global interest-rate strategy at TD Securities, another primary dealer.

 

“Everybody in the fixed-income market should care about this,” she said.

 

In the U.K., where the Bank of England is also debating whether to raise rates, the swap spread reached minus 0.05 percentage points on Nov. 12, the least since December 2013. The difference between 10-year Australian notes and comparable swaps fell to a record last week as speculation diminished the central bank will cut borrowing costs.

 

“Traditional pricing and relative-value rules are breaking down,” said David Goodman, head of global capital markets strategy at Westpac Banking Corp.

 

...

 

“This is not really just a somewhat esoteric story about interest-rate derivatives,” JPMorgan strategists led by Joshua Younger wrote in a Nov. 6 report. “Moves in spreads should be viewed as symptomatic of deeper problems.”

 

Another potential problem is that inverted swap spreads may ultimately cause investors and borrowers to lose confidence in the bond market’s ability to correctly price risk and provide capital to those who need it, according to Steve Major, head of fixed income research at HSBC Holdings Plc.

*  *  *

Alhambra's Jeffrey Snider detailss,

That presents enormous potential problems for the future outlook in all things “dollar.” Again, with interest rates pinned against ZIRP already and any lingering expectations for a rate hike (or somehow a series of them) can only serve as aggravation on this “demand” side for the math. In terms of economic expectations, the growing sense of recession amounts to the same if not more so as it would continue to adversely impact against credit spreads generally. In other words, by far the most likely modeled path for the future direction of at least pension liability discounting (along with the same in insurance company mechanics) is higher in almost every case – the only one where that wouldn’t be true is where the Fed sticks to “lower for longer” as the economy actually strengthens considerably.

 

From that current midpoint, we can reasonably assume that both sides of the dark leverage imbalance will remain in their current directions; eurodollar dealers keep looking to exit while swap and hedging demand continues to sharpen. The resulting compressing swap spreads thus act as quite visible signal of continuing and further financial irregularity that only reinforces both sides of the trend to begin with – just as 2008. It goes until the imbalance forces a full-scale break, like that of August 24, with widespread and forced systemic rebalancing.

 

When I wrote back in September that you ignore swap spreads at your own peril, this is one part that I had in mind – but it is not the only channel. Pension funds and insurance companies represent massive, unthinkably so, pools of both assets and offsetting liabilities that are highly, highly attuned to this math absurdity. Negative swap spreads all over the place, and getting more so, tell us that these huge pools are highly perturbed, as those spread “prices” represent the increasing cost (and reduced availability) of hedging against very real liability upset. Such a condition is, quite simply, highly dangerous. Math is money; and where there is less reliable math, there is less money and then geometrically less patience.

Finally, we leave it to Bloomberg to conclude,

The role of the bond market is to provide funding at the right rates for the real economy,” Major said. “That’s why the bond market exists -- to help efficiently finance projects, businesses etcetera. If that efficiency is undermined, it’s not going to be a positive thing for the economy.”

 

Whatever the reason, the severity of the distortions is unnerving many investors.

 

“What there doesn’t appear to be is any single smoking gun that says why swap spread changes have been so dramatic,” said Thomas Urano, a money manager at Sage Advisory Services Ltd., which oversees $11 billion. The big question remains whether there is “something bigger brewing under the surface that so far hasn’t been pinpointed yet.”

 

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Mon, 11/16/2015 - 20:06 | 6802241 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

the PPT makes all the sense in the world, buddy. Cheer up, they got this. 

Mon, 11/16/2015 - 20:16 | 6802279 A L I E N
A L I E N's picture

Pricing in the inevitable NIRP perhaps?

Mon, 11/16/2015 - 21:55 | 6802614 cougar_w
cougar_w's picture

Timing seems right.

We're off the edge of the map in that case.

Alice had it easier down that rabbit hole.

Tue, 11/17/2015 - 03:19 | 6803101 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

Uncharted waters, to be sure.

Tue, 11/17/2015 - 10:29 | 6804177 asteroids
asteroids's picture

The FED via its printing press and the boyz are picking winners and losers. In such an environment, risk has no meaning. It won't last forever, but the snap back will be a bitch.

Tue, 11/17/2015 - 11:01 | 6804345 ThirteenthFloor
ThirteenthFloor's picture

Bit off topic, notice less "markets" news on ZH lately. The comments on those "markets" stories was shrinking. Basically no gives a "s***" about the casino anymore.

Mon, 11/16/2015 - 21:57 | 6802622 gatorengineer
gatorengineer's picture

I think they arenpricing in a 0.95 euro. To be honest.  I think if you run that and a 140 ish yen it makes sense

Mon, 11/16/2015 - 20:07 | 6802247 i_call_you_my_base
i_call_you_my_base's picture

"That’s why the bond market exists -- to help efficiently finance projects, businesses etcetera."

I thought it was to fund buybacks.

Mon, 11/16/2015 - 20:10 | 6802264 EdSav
EdSav's picture

Unless explicitly stated, a negative rate on the floating leg of an IR fixed payer swap that exceeds the margin (if any) will be 'paid' by the fixed counterparty.. In other words, unless an explicit floor of 0 is noted, a 2% fixed pay IR swap that receives 3ML will not necessarily be fixed pay if 3ML goes negative. 30yr swap spreads have been negative for a fairly long time.. It was only recently that it has crept down to the belly of the curve. Even 3yr swap spreads are close to going negative. When I first saw this happening, my first thought was a repricing of swaps based on the risk of negative rates - that still could be the case. People seem to assume that eurodollar futs can't go above 100, that a fixed payer swap is in fact a fixed payer swap and that the negative carry is known to be finite. Such assumptions, like many others.. are dangerous.. We'll see how this plays out. 

Mon, 11/16/2015 - 20:14 | 6802281 Clowns on Acid
Clowns on Acid's picture

Almost got it. More to it...

Mon, 11/16/2015 - 20:11 | 6802265 buzzsaw99
buzzsaw99's picture

“That’s why the bond market exists -- to help efficiently finance projects, businesses...

TRIPE.

Mon, 11/16/2015 - 20:45 | 6802359 CHoward
CHoward's picture

You say tripe, I say utter bullshit.

Mon, 11/16/2015 - 21:38 | 6802566 Winston Churchill
Winston Churchill's picture

Only if you don't clean the tripe.

Mon, 11/16/2015 - 20:13 | 6802276 Clowns on Acid
Clowns on Acid's picture

Don't worry ... Bernake covered all this swap market inversion in his Princeton PhD thesis just before they called him the smartest man in the world. Greenspan knows all this shheet. Janet Yellen is smellin' dis sheet. Thats why BlacksLives matter mofo'.

 

Mon, 11/16/2015 - 20:14 | 6802280 buzzsaw99
buzzsaw99's picture

Pension funds and insurance companies represent massive, unthinkably so, pools of both assets and offsetting liabilities that are highly, highly attuned to this math absurdity...

That, in a nutshell, is fucked up to begin with.

Mon, 11/16/2015 - 20:18 | 6802289 medium giraffe
medium giraffe's picture

If we swap the '-' function for the '+' function, all of our financial problems will be solved overnight! And I don't even have a PhD!

Mon, 11/16/2015 - 20:37 | 6802337 Kprime
Kprime's picture

what about swapping these  > < or these < > or these /\ \/ or these O O

Mon, 11/16/2015 - 20:18 | 6802290 Ban KKiller
Ban KKiller's picture

Complex systems fail. All it takes is for one "person" to throw a spanner (truth) into the works. Wall Street HATES truth. 

Mon, 11/16/2015 - 20:24 | 6802302 truthalwayswinsout
truthalwayswinsout's picture

Do Central Banker's lives matter?

Mon, 11/16/2015 - 20:26 | 6802305 FreeShitter
FreeShitter's picture

When they are swinging from a lamp post they do.

Mon, 11/16/2015 - 20:25 | 6802304 FreeShitter
FreeShitter's picture

nothing makes sense is right, not even the slightest ounce of it.

Mon, 11/16/2015 - 20:26 | 6802307 CHoward
CHoward's picture
"Nothing Makes Sense Anymore" When the hell did that happen?!?!

 

LOL

Mon, 11/16/2015 - 20:32 | 6802325 booboo
booboo's picture

something must be burnin in the kitchen

Mon, 11/16/2015 - 23:44 | 6802994 o r c k
o r c k's picture

A fire? Yeah, it's making scents now.

Mon, 11/16/2015 - 20:47 | 6802366 pitz
pitz's picture

Got gold, bitches?

Mon, 11/16/2015 - 20:51 | 6802382 kill switch
kill switch's picture

FUBAR

 

 

Thats all...

 

KS

Mon, 11/16/2015 - 20:54 | 6802395 Razzle Dazzle
Razzle Dazzle's picture

No need to extrapolate it's a race to the bottom and going according to plan. You will all be printed into oblivion. Keep rates low on bent stats, have the Ziomedia cherry pick issues and present with a panel of "experts" and if all fails pull out the numerous bazillionairres to talk it up. We all aspire to be like you guys.  Warm up the war machine to reset and start again.  Same as it ever was. By the way, I could set my watch by the gold take down last night. All is above board, move along nothing to see.

Mon, 11/16/2015 - 20:54 | 6802396 Razzle Dazzle
Razzle Dazzle's picture

No need to extrapolate it's a race to the bottom and going according to plan. You will all be printed into oblivion. Keep rates low on bent stats, have the Ziomedia cherry pick issues and present with a panel of "experts" and if all fails pull out the numerous bazillionairres to talk it up. We all aspire to be like you guys.  Warm up the war machine to reset and start again.  Same as it ever was. By the way, I could set my watch by the gold take down last night. All is above board, move along nothing to see.

Mon, 11/16/2015 - 20:55 | 6802400 herkomilchen
herkomilchen's picture

Why not long the treasury and short the swap to arbitrage?

Mon, 11/16/2015 - 21:00 | 6802421 TheRideNeverEnds
TheRideNeverEnds's picture

Spreads are fine, everything is fine, if they were diverging I would worry but it's a race to the bottom and we are all neck and neck.

Call me when the 2y hits -100

Mon, 11/16/2015 - 21:15 | 6802479 Demdere
Demdere's picture

There is no technology to control open, evolving complex systems such as economies and societies.

If systems are not designed to be failsafe, and tested under conditions such as they actually experience, they will fail.  Our systems are not so designed, and no economy has ever been in this state, it is far larger and extremely different than ever in history.

So of course it is failing.

https://thinkpatriot.wordpress.com/2015/11/11/dynamics-of-national-colla...

https://thinkpatriot.wordpress.com/2015/11/10/a-measure-of-propagandas-p...

https://thinkpatriot.wordpress.com/2015/02/26/complex-systems-and-the-hu...

Mon, 11/16/2015 - 21:53 | 6802608 Aussie Battler
Aussie Battler's picture

Central Bankers are scum

Mon, 11/16/2015 - 22:01 | 6802638 kaboomnomic
kaboomnomic's picture

Nothing makes SENSE in a CASINO alright. Now... go ahead. Place your BET!!

Mon, 11/16/2015 - 22:27 | 6802737 FreeShitter
FreeShitter's picture

They will pump this fucker up for a few days lure in the gamblers and pull the lever. See this shit a mile away. No more steady inclines or declines. Its one big giant cum shot in either direction.

Tue, 11/17/2015 - 00:00 | 6803040 hedgiex
hedgiex's picture

Just witnessing the tail (financial economy) that used to wag the dog dropping off. So all these traders call them distortions and extrapolate on "something big is brewing". There are still more creative ways to keep Try at zero. Wealth of the Elites is predicated on this benchmark while they play the volatilites that include the bounces above/below zeros in other spaces. Never forget who holds 90% of the wealth that has to be preserved at all costs. You bet that they know more about the declining liquidities in these games and they are not into cannibalism as yet albeit their functionaries in finance can be discarded tissues.

 

Tue, 11/17/2015 - 00:03 | 6803051 Cult of Criminality
Cult of Criminality's picture

Take it easy folks,it`s contained.

Tue, 11/17/2015 - 02:20 | 6803350 e_goldstein
e_goldstein's picture

"markets," now that's fucking funny.

Tue, 11/17/2015 - 02:49 | 6803384 seek
seek's picture

Rule #1: Never be invested in anything you don't understand.

If professional traders are saying nothing makes sense, that's a GTFO signal if I've ever heard one.

Tue, 11/17/2015 - 02:55 | 6803392 Gene Watson
Gene Watson's picture

United States Swap Spreads mentions something about 2023.   http://www.counterpunch.org/2015/10/28/united-states-treasury-swap-sprea...

Tue, 11/17/2015 - 06:32 | 6803604 Wild E Coyote
Wild E Coyote's picture

Since everyone over time learned to keep their wealth in USD$. The Global elites have already been setting up their private Safe in China among a few others, like Singapore and Hong Kong. But mainly in China. They have also secured Russian oil to drive the China machine. 

Now its time to let the US economy die a peaceful death. After all maximum that can be extracted has alreayd been done, with bad assets downloaded onto US Government and Fed books. 

"And now, as Bloomberg reports, it appears the mainstream is beginning to recognize that something very strange is going on in debt markets." 

Well the MSM has now been allowed to talk freely. how else can the collapse be accelerated. In the process wiping out everything that common American Folks have earned and saved over time.

Moreover, Good sustainable companies with real value, have been buying up their own shares from markets, think about the consequence. People who want to participate are forced into Bonds. 

Welcome to the real world. The clean up is beginning. 

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