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"How Is This Possible" Deutsche Bank Asks, Looking At The Canary In The Junk Bond Mine

Tyler Durden's picture




 

When it comes to recent inexplicable and notable market divergences, few are as disturbing as the gaping spread between equities and junk bonds, best shown on the chart below.

While we have been covering this topic since at least September, when the divergence first appeared, many are starting to ask what is going on. Case in point, DB's head credit strategist, Jim Reid, who like most, is stumped. To wit:

Last week was the best week for the S&P 500 since December 2014 but US HY continued to under-perform virtually all major comparable asset classes. Sentiment wasn't helped by the postponement of the Veritas LBO financing which was the largest private equity buy out of the year. The riskiest part of the market continues to be soft. Our US strategist Oleg Melentyev outlined the divergent performance in his note on Friday night. IG bonds are 5bps tighter since late October, while their HY index is 40bps wider. Within HY, BBs have widened by 20bp while CCC spreads jumped by 75bps - over double what would be appropriate given normal betas. Even in the October rally CCCs lagged BBs in absolute terms which is very rare for such a high beta move tighter. It's not even an Energy story as the numbers are similar with or without.

 

US HY is also now underperforming all major related markets and is even struggling against much of EM. The big question within credit and to the wider global markets community is whether this can be contained or whether it is reflecting a turning and deteriorating credit cycle that is going to be tough to stand in the way of. Our base case at the moment is that the US is late cycle but that there is probably at least another year left of it. We also think Europe is still relatively steady fundamentals wise. As such we're not inclined to panic by developments in US HY. However it’s something that investors in all asset classes should be keeping an eye on.

They certainly are, and none perhaps better than Reid's colleague at DB, Oleg Melentyev, whose note we summarized over the weekend but here are the key highlights again:

Segments of credit market diverged in the past couple of weeks with higher quality paper holding up relatively well, while lower quality remaining under meaningful pressure. IG bonds are 5bps tighter since late October, while our HY index is 40bps wider. Within HY, BBs widened by 20bp while CCC spreads jumped by 75bps; keep in mind that normal beta between these two segments is 1.6x, so a 20bp widening in BBs should imply a 35bps move in CCCs. This is a continuation of trend we have seen in October, where the second-strongest post-GFC rebound in HY was in fact driven by stronger tightening in BBs (65bp) than CCCs (53bps). Even ex-Energy, relative performance of these two components was indistinguishable (-62 and -65 bps respectively).

 

* * * 

 

[It] is quite an unprecedented set of circumstances to have a very strong market move tighter that is not led by its higher-beta components. It also gives us a sense of a low level of conviction prevailing among market participants: I don’t want to miss out on the rally and yet I don’t want to touch the high-octane stuff, even ex-energy, as my confidence in issuer fundamentals and persistent low-defaults is diminished.

 

* * *

 

Figure 1 shows how CCCs are now underperforming BBs on a trailing 12-month total return basis, by 700bps all-in and 460bp ex-Energy. There are only three instances of underperformance this deep, two of them coinciding with developing credit cycles in early 2000 and early 2008, and one false positive in late 2011. We have previously addressed the latter case in our Evolution of the Default Cycle piece a few weeks ago, pointing at its differentiating features such as early cycle stage (only 2 years out of the previous recession) and easing policy stance (the Fed expanding on its QEs, not rolling them back or hiking rates).

It gets even weirder:

[An] interesting and unusual development is taking place on a high-level across asset classes, where US HY is now underperforming all major related markets, Including loans (-1.2%), IG (-0.5%), equities (-2.1%), Treasuries (-6%), EU HY (-3.7%) and even external EM sovereigns (-4.3%). The most intriguing detail here, in our view, is that HY is underperforming both IG and equities at the same time. Think about how unusual this is for a moment. If HY is an asset class that sits somewhere in the middle on a risk scale between high quality bonds and equities, then normally we would expect it to be underperforming one and not the other, as they would normally move in opposite directions.

Just as important, the weakness is not just in energy names - as Melentyev notes, the recent bursting of the retail bubble suggests the US consumer is quite sick.

Recent disappointing results announced by retailers ranging from Walmart to Macy’s to Nordstrom to Best Buy has also caught our attention as an odd development. Somehow, we were under the impression that these were supposed to be the best of times for the US consumer: employment trends are strong (as evidenced by nonfarm, claims, and unemployment rate), wages are going higher (21 states raised their minimum wages in 2015, as well as some major private employers such as Walmart, McDonalds), gasoline prices are at 10 year lows as are home heating bills, equities are at cyclical highs, and home values have recovered. So if consumers are cutting on their discretionary spending with all these tailwinds in place, there must be something else going on.

That something else could be the Amazon substitution effect, but as Oleg points out, AMZN revenues were $90 billion compared to $1 trillion for all other US retailers: hardly an offset (and it still has $0 net income, when one strips away the AWS business). Additionally, consumers have not had a problem with purchases of staples - the weakness has been entirely in the discretionary spending space, suggesting something else (coughobamacarecough) is soaking up much of this undisposable income:

 

Melentyev's rhetorical conclusion - how are these gaping, unprecedented divergences between virtually every other asset class to stocks possible?

The hardest questions we are trying to reconcile here are how is that possible to see all these signs of weakness under the surface – including weak commodities, tightening credit, retrenching consumer spending – being balanced by very strong equity markets and upbeat employment picture. One of these sides has to be wrong in its assessment of the current macro environment, and seeing both of them extending well into the future appears unlikely to us.

How? Ask the central banks.

As for this divergence ending soon, don't hold you breath: if these same central banks decide the divergences should extend well into the future with now daily "whatever it takes" statements (even coming from Saudi Arabia as of this morning), expect mass confusion to be the norm for a long, long time.

 

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Mon, 11/23/2015 - 09:52 | 6827067 Dr. Engali
Dr. Engali's picture

Junk bawnds aren't a policy tool, stawks are.

Mon, 11/23/2015 - 10:15 | 6827102 FireBrander
FireBrander's picture

"How Is This Possible"

 

Seriously?

I (FED) give you a trillion bucks at 0%, you (banks) "invest" it in something I want "demand" for (ALL paper debt), you make money risk free!

And since "everyone knows" the FED "has your back" when it comes to owning paper debt, you get desperate "yield reaching" by the folks (elderly, InsurCo's, Pensions) being CRUSHED by ZIRP!

Exactly as planned and PUBLICLY PROMISED by Bernanke...drive people out of bank accounts and into Wall Streets' "financial products"...this will "re-inflate" the stock market, make everyone "rich" on paper, that wealth will "trickle down" to Main Street and the economy will boom!

How hard is that to understand?

 

Mon, 11/23/2015 - 10:16 | 6827133 BurningFuld
BurningFuld's picture

He who bullshits first bullshits best. It's nice to be a leader.

Mon, 11/23/2015 - 10:26 | 6827165 knukles
knukles's picture

One of these things has to be wrong.  No Shit, Klaus
Bonds have always and continue to be, by far, better discounters of the future than stocks.
Ever listened to the difference between Jim Cramer and Rick Santelli?
                                         Go Figure  There are Bond people and Stock People
                                                The latter are like Progressives
                                                        Everything's Fine

Mon, 11/23/2015 - 10:45 | 6827209 J Jason Djfmam
J Jason Djfmam's picture

And Santelli's point of view is the middle ground of reality.

 

Mon, 11/23/2015 - 10:45 | 6827215 remain calm
remain calm's picture

Its only possible in fantasy world, once we turn to reality a lot of people are going to hurt once the pixy dust doesn't work anymore.

Mon, 11/23/2015 - 11:03 | 6827261 Handful of Dust
Handful of Dust's picture
Deutsche Bank Said Planning 1,000 London Job Cuts: Sunday Times

 

http://www.bloomberg.com/news/articles/2015-11-22/deutsche-bank-said-pla...

 

" We restructured some folks. "

Mon, 11/23/2015 - 11:37 | 6827390 -.-
-.-'s picture

"Additionally, consumers have not had a problem with purchases of staples - the weakness has been entirely in the discretionary spending space, suggesting something else (coughobamacarecough) is soaking up much of this undisposable income..."

 

And, now it can potentially use your unsecured tax dollars to soak up their having soiled themselves with their Responsibilites and crying aloud regarding the rash around their asses that is caused by Accountability.

Mon, 11/23/2015 - 12:18 | 6827505 RaceToTheBottom
RaceToTheBottom's picture

Right-Sizing.

We got rid of all those Wrong-Sized Resources.....

Mon, 11/23/2015 - 12:08 | 6827481 KnuckleDragger-X
KnuckleDragger-X's picture

It's just a matter of whether you took the red or blue pill........

Mon, 11/23/2015 - 12:30 | 6827548 MadVladtheconquerer
MadVladtheconquerer's picture

Does it come in an injectable?  Nothing quite like main-lining to do you up right.

Mon, 11/23/2015 - 12:32 | 6827556 KnuckleDragger-X
KnuckleDragger-X's picture

Well, there is the white, powder form from S. America.......

Mon, 11/23/2015 - 12:42 | 6827587 MadVladtheconquerer
MadVladtheconquerer's picture

Soluble w/ a little hydrochloric acid and some heat......

BINGO!  Done up right!

Mon, 11/23/2015 - 11:20 | 6827326 Imagery
Imagery's picture

Until it DOES NOT.  AND.WE.ARE.NOW.AT.THE.DOES.NOT.STAGE.

 

Mon, 11/23/2015 - 10:08 | 6827112 ThirteenthFloor
ThirteenthFloor's picture

The hardest questions we are trying to reconcile here are how is that possible to see all these signs of weakness under the surface – including weak commodities, tightening credit, retrenching consumer spending – being balanced by very strong equity markets.

"Magistrate, the intelligence of the being is shockingly limited".

Mon, 11/23/2015 - 10:29 | 6827169 J Jason Djfmam
J Jason Djfmam's picture

The 99% are hiding their wealth and prosperity.

We need to go to a cashless society, then the numbers will match. Obviously sarcasm.

Mon, 11/23/2015 - 09:59 | 6827086 Klemens
Klemens's picture

a lot of green today: http://pigbonds.info/

Mon, 11/23/2015 - 10:01 | 6827089 Chuckster
Chuckster's picture
Deutsche Bank'S record has been total inept at everything they do.

So now listen to them?

Mon, 11/23/2015 - 10:02 | 6827091 buzzsaw99
buzzsaw99's picture

Somehow, we were under the impression that these were supposed to be the best of times for the US consumer: employment trends are strong (as evidenced by nonfarm, claims, and unemployment rate), wages are going higher (21 states raised their minimum wages in 2015, as well as some major private employers such as Walmart, McDonalds), gasoline prices are at 10 year lows as are home heating bills, equities are at cyclical highs, and home values have recovered. So if consumers are cutting on their discretionary spending with all these tailwinds in place, there must be something else going on.

is this guy clueless, or just pretending to be clueless? roll out the guillotines.

Mon, 11/23/2015 - 10:06 | 6827106 Francis Marx
Francis Marx's picture

Come on buzzy, you know what the CEO of Gallop said at the beginning of this year. All the employment figures are just a fabrication.

Mon, 11/23/2015 - 10:08 | 6827111 buzzsaw99
buzzsaw99's picture

any piece that pretends price inflation is low and wage inflation is high while also failing to mention the drag from owebombacare is worthless.

Mon, 11/23/2015 - 12:08 | 6827480 Bay of Pigs
Bay of Pigs's picture

Douche Bank is worthless...

Mon, 11/23/2015 - 10:03 | 6827096 slaughterer
slaughterer's picture

Maybe Junk was just over-priced 6 months ago.   Nothing rteally to worry about.  /sarc

Mon, 11/23/2015 - 10:05 | 6827104 buzzsaw99
buzzsaw99's picture

he starts with a market divergence and ends with pretending to think a raise in the minimum wage = phat times for the sheep.

Mon, 11/23/2015 - 10:23 | 6827156 FireBrander
FireBrander's picture

When you "raise wages" you get a BETTER pool of applicants.

Construction Industry:

At $9 an hour, you'll need 3 people to get a job done poorly.

At $20 an hour, you need 1 person and it's done right the first time!

There was a local posting on Craiglist for construction labor...guy says "I won't pay more than $9 an hour"..."If you're going to show up drunk, or late, or not at all, or steal from me, don't bother applying"...moron.

Mon, 11/23/2015 - 10:46 | 6827218 chubbar
chubbar's picture

The standard response when asked about quality of work "I'm not very fast but it'll look like I hurried when I'm done". Get's em everytime.

Mon, 11/23/2015 - 11:42 | 6827402 swmnguy
swmnguy's picture

Employers who run their businesses like that often adopt the slogan, "We're not happy until you're not happy."

If you insist on only hiring bums, guess what all your employees will be?

Mon, 11/23/2015 - 12:24 | 6827527 mademesmile
mademesmile's picture

I'm married to a carpenter and there is a huge shortage of men with construction experience in their 30's who show up with a clear head ready to work. The fall out of '08 meant a lot of guys left the field for greener pastures. My husbands coworkers are all in her 60's. I'm wondering who is going to to the dirty jobs that need to get done? Are younger men really just on Facebook / video games/ party on the weekend and wearing glitter beards? I'm sure not all of them - but there is a list of dozens of companies that pay $35 and hour and CANT find anyone.

Mon, 11/23/2015 - 12:53 | 6827633 Tall Tom
Tall Tom's picture

CAN'T find anyone qualified.

 

FIFY.

 

Those listings demand experience.

 

In tight economic times companies cannot afford to hire apprentices to train under the jouneymen. We have lost the Trade Guild tradition in our workforce.

 

Job training takes an investment of time and the supply of experienced potential employees are retiring in droves as the Boomers retire.

 

And why shall anyone pay for shoddy work at a rate of $35/hour? If I were interviewing and offering that then I'd damn well want to see a portfolio of their past work.

 

You ought to see the"repair" to the facia on the Jack in the Box here in Lakeside, CA.

 

It is something that I'd expect...from a Twelve Year Old. Yes. It is not inline at all. Not squared up. It is terrible. And Jack in the Box paid out $6000 to have that done? It is laughable. The "carpenters" did not even knowhow to cut a 45o Angle with a Table Saw.

 

(Now that is fuckin' bad. But it provides me with some good merriment and laughter.) 

Mon, 11/23/2015 - 16:59 | 6828573 mademesmile
mademesmile's picture

That's precisely my point. There is a BIG hole where the younger, experienced carpenters should be. And this is in the Midwest, can't even imagine the problem this causes on the coasts.

Mon, 11/23/2015 - 10:05 | 6827103 Davilis
Davilis's picture

This is why DB is bankrupt again (or still...) - they can't figure out global capital flows.

Mon, 11/23/2015 - 12:57 | 6827663 Tall Tom
Tall Tom's picture

DB is NOT exceptional because it is bankrupt....er...insolvent. Bankruptcy is a legal term.

 

They are all insolvent as there is still no mark to market.

 

They can just fabricate the value of any asset on their balance sheet in order to demonstrate "solvency"

Mon, 11/23/2015 - 10:10 | 6827115 slaughterer
slaughterer's picture

DB is like a wanna-be Ivy League university, filled with its star students elbowing each other to get the attention of the Board of Directors, and its frat barbarians playing wth the trading keyboards and algos.  A real second-rate pool of Animal House chaos whose only chance of survival are the hand-outs it gets from Super Mario.  

Mon, 11/23/2015 - 10:14 | 6827118 razorthin
razorthin's picture

How very disingenuous of them not to acknowledge the Fed-Fucked "markets".  Or, more properly, that the "markets" are indeed Fed-Fucked.

Mon, 11/23/2015 - 10:12 | 6827122 buzzsaw99
buzzsaw99's picture

we-are-being-trolled-by-deutsche-bank-douche-nozzle-roll-out-the-guillotines

Mon, 11/23/2015 - 10:14 | 6827128 LawsofPhysics
LawsofPhysics's picture

Quick, run to the "safety" of government debt....

same as it ever was...

Mon, 11/23/2015 - 10:15 | 6827131 mijev
mijev's picture

If I spent all week analyzing junk and trannies I'd probably be a little confused too.

Mon, 11/23/2015 - 10:20 | 6827146 buzzsaw99
buzzsaw99's picture

Hard to believe a guy named Oleg could be such a tool. /s

I suggest that when the layoffs come at deutsche bank they start with him.

Mon, 11/23/2015 - 10:31 | 6827178 J Jason Djfmam
J Jason Djfmam's picture

Douche   Bank   .

Mon, 11/23/2015 - 10:29 | 6827173 SheepDog-One
SheepDog-One's picture

Deutschebag Bank pretending they don't know what's going on, innocent bystanders pondering charts......wow the shit must really be getting serious!

Mon, 11/23/2015 - 11:36 | 6827387 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Did you mean Douchebag Bank?

Mon, 11/23/2015 - 10:52 | 6827231 SMC
SMC's picture

Building their documentation for “It is not our fault, we knew something was very wrong with the data, but we did the best we could...” while they slide into default and the "bailed-in" pitchforks start lining up outside their doors.

Mon, 11/23/2015 - 10:54 | 6827248 Unknown Poster
Unknown Poster's picture

Three card monte is harder to play with negative swap spreads.

Mon, 11/23/2015 - 11:10 | 6827288 unauthenticated
unauthenticated's picture

130 positions are up for grabs at a grocers warehouse; 27,000+ applicants in THREE days. Unemployment is at 5.0%...sure. 

 

Mon, 11/23/2015 - 11:14 | 6827300 Platinum_Investor
Platinum_Investor's picture

It doesn't matter.   Stocks UP - Gold DOWN until WW3 happens.  Nothing else is going to happen accept for that. 

Mon, 11/23/2015 - 11:20 | 6827323 Latitude25
Latitude25's picture

And how is it possible that DB even fucking exists today?

Mon, 11/23/2015 - 11:23 | 6827325 PhiBetaZappa
PhiBetaZappa's picture

"One of these sides has to be wrong......."

Nonsense, a refresher course in 'doublethink' is all that's needed for the author to see that there's no problem at all.

Mon, 11/23/2015 - 11:28 | 6827355 BeaverCream
BeaverCream's picture

ZH, too many charts not enough Brazil girls.

Mon, 11/23/2015 - 11:30 | 6827360 lester1
lester1's picture

The Fed buys stocks covertly through their primary dealer banks. That's why the market keeps going up no matter the data.

 

Audit the Fed !!!

Mon, 11/23/2015 - 11:34 | 6827373 Kickaha
Kickaha's picture

This article reads like some guy trying to tell his best friend that his wife's car was parked int front of Room 105 at the no-tell motel, that the sounds of a mattress squeaking and a headboard banging against the wall could be heard coming out of that Room, accompanyied by girly moans and squeals of delight, but everybody knows she sings in the church choir.

You just don't come right out and say she's a cheating skanky whore.  You let him draw his own conclusions. 

Mon, 11/23/2015 - 11:43 | 6827397 fowlerja
fowlerja's picture

"How is it possible?: Alice posed that question many years ago.... “If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?” ? Lewis Carroll, Alice's Adventures in Wonderland & Through the Looking-Glass

Mon, 11/23/2015 - 11:43 | 6827403 yogibear
yogibear's picture

LOL, Douche-bank is credible? 

All the central banks are playing financial games now. Mark-to-fantasy accounting.

Mon, 11/23/2015 - 11:48 | 6827412 TheGuru
TheGuru's picture

I like looking at pretty graphs on ZH. I am also thinking about stopping visiting for the over zealous use of words like Plunge(d) and Soaring.

Mon, 11/23/2015 - 12:39 | 6827573 MadVladtheconquerer
MadVladtheconquerer's picture

Yaaa, "grunged" and "boring" are more appropriate.

As in:  "The PMs were grunged by traders approaching Nirvana."

Oil was boring after the inventory build report."

https://www.youtube.com/watch?v=YqN0ZOEO9oI

Mon, 11/23/2015 - 11:51 | 6827424 PrimalScream
PrimalScream's picture

DON'T WORRY.

They've got a PLAN to save the world financial system.  The plan involves Traders making all the important decisions about what to do next.

Yes, in a nutshell, Reckless Traders Will Save The World.

That is the plan.

so really - don't worry, be happy!

Mon, 11/23/2015 - 12:19 | 6827498 Debugas
Debugas's picture

it is possible because investors still believe that the debts they hold claims on will be repaid

this delusion can last for long but ultimately will be recognized as such

P.S.

Looks like Douche Bank started asking themselves - are we delusional or not (e.g. can we force greeks to surrender their real assets to us in exchange for the greek bonds we hold) ?

LOL!!!

This is a good sign they started questioning the value of what they hold :)

Mon, 11/23/2015 - 12:45 | 6827605 tarabel
tarabel's picture

 

 

Even a well-paid investment banker ought to recognize that raising the minimum wage in 21 states is going to leave a mark.

Demand for HY is diverging from demand for IG?

What a surprise to see a flight to (assumed) quality in front of an anticipated re-re-recession.

When people turn away from income production to asset preservation, things are going to go south for everyone else in short order.

However it might be for everyone else, this is definitely not good news for those holding options in Clinton, Inc.

Mon, 11/23/2015 - 13:13 | 6827722 Grandad Grumps
Grandad Grumps's picture

Nobody is wrong. Price means nothing but price. It is 100% controlled.

Do NOT follow this link or you will be banned from the site!