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To Junk Bond Traders "It Almost Feels Like 2008"

Submitted by Tyler Durden on 11/25/2015 22:00 -0400

Despite distressed-debt funds suffering their worst losses since 2008, mainstream apologists continue to largely ignore the carnage in the credit market (even though veteran bond managers have urged "it's not just energy, it's everything.") With the number of loan deals pricing below 80 (distressed) at cycle peaks, and "a less diverse group of investors holding a lot more bonds," price swings continue to be wild but as DB's Melentyev warns, initially "all of this looks random when there is no underlying news to support the big moves. But eventually a narrative emerges -- maybe we have turned the corner on the credit cycle."

Investors are shunning the lowest-rated junk bonds.

That is underscored by the extra yield that investors are demanding to hold CCC rated credits relative to those rated BB. This has jumped to the most in six years.

As Bloomberg reports,

With confidence slipping in the strength of the global economy, there are fewer investors to take the opposite side of a trade in the riskiest parts of the market, according to Oleg Melentyev, the head of U.S. credit strategy at Deutsche Bank.

"These are all small dominoes in one corner of the market," Melentyev said. "In the early stage, all of this looks random when there is no underlying news to support the big moves. But eventually a narrative emerges -- maybe we have turned the corner on the credit cycle.

One sometimes-overlooked element that’s contributing to the big price swings is the increasing concentration among investors, according to Stephen Antczak, head of credit strategy at Citigroup Inc.

Mutual funds, insurance companies and foreign investors make up 68 percent of corporate bondholders compared with 52 percent at the end of 2007.

That means that if one mutual fund investor wants to sell some holdings, there isn’t another one that’s ready to step in. That’s because they typically have similar mandates from investors and often need to sell for the same reasons.

"A less diverse group of investors hold a lot more bonds," Antczak said. "The difference between incremental buyer is more now than it used to be. It takes a bigger move to get people interested."

Bonds of smaller companies that carry a high amount of debt relative to earnings are most susceptible to falling quickly after earnings are reported, said Michael Carley, a co-founder of hedge-fund firm Lutetium Capital.

Money managers looking at the bonds of those types of companies aren’t spending time examining the issues in those businesses before selling because they’ve got their “own wounds to lick,” said Carley, the former co-head of distressed debt at UBS AG. “And the dealers are saying, ‘I don’t own it; I don’t care.’ So it just plunges.”

As we noted previously, for the first time ever, primary dealers' corporate bond inventories have turned unprecedentedly negative. While in the short-term Goldman believes this inventory drawdown is probably a by-product of strong customer demand, they are far more cautious longer-term, warning that the "usual suspects" are not sufficient to account for the striking magnitude of inventory declines... and are increasingly of the view that "the tide is going out" on corporate bond market liquidity implying wider spreads and thus higher costs of funding to compensate for the reduction is risk-taking capacity.

* * *

One wonders when stock investors will wake up again?

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Wed, 11/25/2015 - 22:01 | 6840835 BlueViolet

The coming Financial CATACLYSM. It'll be Ugly, Bloody, and Messy >> http://bit.ly/1KogtGi

Wed, 11/25/2015 - 22:04 | 6840851 coinhead

was hoping for a link to teh Angry Sinner Blog. :(

Thu, 11/26/2015 - 00:59 | 6841382 cheka

remember trying to buy preferred stocks back then (junk bonds a better description) --- they had quoted prices that were down 50 percent and double digit yields

the price quotes were a mirage. i put in A LOT of limit orders at ask. got very few filled

Wed, 11/25/2015 - 22:11 | 6840860 ebworthen

Like other commodities, I heard on the radio tonight that Farmers profits are projected to be down 40% this year.

Less corn for ethanol because of the crash in oil prices make it less profitable, and a drop across the board in the value of all agricultural commodities.

QE and ZIRP have wreaked havoc on the valuation of everything, and mis-allocated resources in all categories.

Central Bank bubble 2.0.

Wed, 11/25/2015 - 23:44 | 6841186 sodbuster

>Less corn for ethanol because of the crash in oil prices make it less profitable, and a drop across the board in the value of all agricultural commodities.<

I'm gonna try and be nice, cause ya got the part right about QE and Zirp. But you don't know jack shit about farming or ethanol. Yes prices are down, and farm income will be down. This years corn crop is projected to have a 1.8 bln bu carryover. The 3rd largest crop EVER! There is MORE corn for ethanol, not less. Ethanol plants are running full bore. And they are making money. I know. My son is a chemical engineer for Valero. Just look at their earnings. And farmers are used to the ups and downs. Seen them many times before. The drop in the ag prices are because we are good at producing, and if the weather cooperates, there is plenty. Prolly the biggest negative for US producers, is the value of the dollar, and EM are in the crapper. Totally agree with you on the CBs bubble and mis-allocated resources.

Thu, 11/26/2015 - 02:29 | 6841532 Central Bankster