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It's Not Just ETFs Anymore, Cash Bond Markets Are Plunging

Tyler Durden's picture




 

While high-yield bond ETFs have been under massive pressure, some have argued that this carnage has yet to really hit the underlying cash bond market (since the flows are more exchanges between two parties as opposed to redeeming ETFs for actual bonds). It would appear that pattern is changing as today the bloodbath in ETFs is spilling directly into the corporate bond markets themselves with every sector in investment grade and high yield deep in the red.

As Bloomberg noted Friday,

HYG saw outflows of $560 million on Friday, its third worst day ever. But this was only 13 percent of its total $4.3 billion in trading volume, meaning 87 percent of the trading didn’t involve touching the underlying bonds. To put it another way, 87 percent of the trading was between two parties over an exchange and/or through a market-maker taking the other side. Some 13 percent, however, involved the redemption of HYG shares to the ETF's provider, Blackrock, in exchange for a basket of junk bonds.

But today, the pressure is really starting to hit the underlying bonds...

 

Now the vicious cycle begins... and as we have already seen - the contagion is spreading.

 

Charts: Bloomberg

 

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Mon, 12/14/2015 - 15:39 | 6922686 Hitlery_4_Dictator
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I'm not worried until it spreads to equities, I'm a dumb sheeple. 

Mon, 12/14/2015 - 15:41 | 6922697 froze25
froze25's picture

I have been telling my friends and family for the last 2 months now to move their investments or IRA/401k's into moneymarket account equivalent products. I don't think anyone of them listened to me. I have already done it with my families investments. Looks like I will get the I told you so moment.

Mon, 12/14/2015 - 15:46 | 6922718 madcows
madcows's picture

any bets that the money market accounts get taken down too?

I'm about 50% hedged in MMA's.  So, I'm betting the goon squad takes that, along with my dividend bearing equities and good for nothing treasuries.

theres just no way the squid and company don't somehow take it all.  They do run the FED, and own the government, after all.

sure wish I could buy me a congressman.  I'd line my pockets with all sorts a free cash.

Mon, 12/14/2015 - 15:52 | 6922745 Slurm
Mon, 12/14/2015 - 16:39 | 6922960 Neil Patrick Harris
Neil Patrick Harris's picture

That spot between the matress and the bedframe is looking like a really hot investment opportunity right now.

Mon, 12/14/2015 - 16:05 | 6922808 LawsofPhysics
LawsofPhysics's picture

If they take MMA's, which is the ONLY place most 401k sheep can "park" cash (as MANDATED by most plans), there most definitely will be fucking blood.  The bankers and financiers basically FORCED everyone in 401ks that use to have some pretty good options, now they are FORCING (via K-street) people into losing positions.  The best part comes when the bankers and financier actually profit from those losing positions and then request another BAILOUT because the company store went bankrupt (even though they made out like bandits).

 

Still waiting for all plans to FORCED to make everyone have a MyIRA...  many already have to have a certain amount of government paper...

Go ahead motherfuckers, pull it, I triple dog dare you.

Mon, 12/14/2015 - 16:20 | 6922873 Tom Servo
Tom Servo's picture

FYI Fidelity's "Money market" equivalent is now a gov bond fund... Former coworkers told me about it.  I had liquidated my 401k earlier in the year...

 

lube accordingly...

 

Mon, 12/14/2015 - 16:06 | 6922815 jack reacher
jack reacher's picture

I gave up preaching, they just assume you dont know what you're talking about as its not in the mainstream press.

The funniest bit I hear is to stop being negative and I respond with I'm pretty excited as I've got short positions. That always messes with their heads

Mon, 12/14/2015 - 16:37 | 6922944 Gambit
Gambit's picture

Lmaoooo! It is excting! I short too. News like this is music to my ears. 

Mon, 12/14/2015 - 16:36 | 6922939 Gambit
Gambit's picture

Me too! I am actually tired of saying it... now I just node and smile and keep to myself. And when they ask for my opinion i ask them " Do you want to hear what you want to hear, or the truth?" Generally my conversation stops there.  Although, couple of my friends/cousins have listened to me.  Slowly they are appreciating my advice as new information becomes available.   

Mon, 12/14/2015 - 15:41 | 6922694 glenlloyd
glenlloyd's picture

uh oh, I thought we were assured this was 'largely contained'?

I wonder if this will put the stops on the Ole Yellerin rate hike?

Mon, 12/14/2015 - 15:43 | 6922702 froze25
froze25's picture

They cannot ever saying anything but "Everything is fine" or will be fine, nothing to worry about so they themselves don't cause a panic or market run. Don't trust a word from them.

Mon, 12/14/2015 - 15:41 | 6922695 arbwhore
arbwhore's picture

Next leg down for PMs on its way. Last chance to sell gold over $1000... probably for the next 15 years... maybe more.

Mon, 12/14/2015 - 15:49 | 6922720 froze25
froze25's picture

I am not sure about the timeline but I agree that deflation will happen across the board including PM's. In 2008 Gold and Silver went down with the rest of everything else. I do think that it will rebound first though. For the record I am not selling any of my PM's they are simply a hedge against dedollarization that I don't see happening now but you never know.

Mon, 12/14/2015 - 15:55 | 6922759 SoilMyselfRotten
SoilMyselfRotten's picture

 I do think that it will rebound first though

 

If there is truly the paper shitshow some suspect may occur across all assets, gold may be the only thing rebounding

Mon, 12/14/2015 - 17:02 | 6922883 knukles
knukles's picture

We've not reached anywhere near the panic stage .... yet.
Also, it is not unusual at the start of distressed periods (And I am not saying anything about whether this is or is not, just a historical what usually happens) everything tends to get hammered into the initial stages.  The "Only Port in the Storm" so to speak is cash equivalents.  Even today 0.1% is better than negative as in red ink, losses, etc.
And BTW, for professional money managers, the greatest sin is to loose money.  Preservation on the downside can make up for many years of under-performance on the upsides.

Then the flight to quality shortly thereafter ensues ... Treasuries (or Bunds in DE, Guilts in GB, etc) ... and PMs
However, with respect to PMs, that has usually been the case when we've already had high inflation or the Fed is going bananas easing (Stirring up inflationary expectations)
All the meanwhile, the Risk assets just leak lower or get pounded.

Now, during the Big downturns, the critical bell-weather has almost always manifested itself in the cash/short term markets.
Why?
Because that's where, aside from the banks, that liquidity is to be found (Liquidity as in funds availability, not marketability)  And in absence of liquidity, then there's either insolvency or bankruptcy, etc.

So the Hail Mary Indica is to be Found in the Short Term Markets.

Why do you guys and gals think that Paul McCulley (of PIMCO, who was a phenomenal thinker) sat on the short term desk?

Will it or won't it?  Time will tell, but it is unfolding like a classic precursor of Much Worse Ahead

Mon, 12/14/2015 - 15:50 | 6922741 kill switch
kill switch's picture

the next 15 years..

 

That's the year when you graduate High School you fucking stooge.....

Mon, 12/14/2015 - 15:53 | 6922751 Citxmech
Citxmech's picture

Next leg down, I'm going to double-down and back up the truck.  Thinking Ag rather than Au for now, however.

Mon, 12/14/2015 - 16:36 | 6922942 Bernoulli
Bernoulli's picture

whatever, dude.

Mon, 12/14/2015 - 16:43 | 6922967 arbwhore
arbwhore's picture

Such wit! Such intelligence!

Given all the juvenile comments, downvotes and very few reasonable arguments against, I have to assume I'm on the correct side of the trade as there is still FAR too much bullishness in the gold bug community.

Mon, 12/14/2015 - 16:48 | 6922992 zipit
zipit's picture

arbwhore has a point.  Some folks must capitulate before a bottom's in.  And the capitulation will make eTrade baby cry for mommy.

Mon, 12/14/2015 - 16:50 | 6923001 arbwhore
arbwhore's picture

It will be epic and there won't be any "backing up the truck" comments like we see every time there is a tiny dip downward.

Mon, 12/14/2015 - 17:11 | 6923089 Bernoulli
Bernoulli's picture

"Reasonable arguments" against "Last chance to sell gold over $1000"?

I'm not sure if that's possible.

Tue, 12/15/2015 - 19:48 | 6928090 kill switch
kill switch's picture

Such wit! Such intelligence!

 

Like your one line post that I should be in awe of? And that puts you on the right side of the argument??  

 

I'll give you my one liner, gold will be at $30,000.00 in eight months...probably.

Mon, 12/14/2015 - 15:44 | 6922698 THE COIN
THE COIN's picture

Just like The Poseidon Adventure, the wave finally has arrived.

Mon, 12/14/2015 - 15:45 | 6922713 Bill of Rights
Bill of Rights's picture

( The Pig ) Wheeeee! Wheeeee!

Mon, 12/14/2015 - 15:58 | 6922777 Nikki Alexis
Nikki Alexis's picture

I'm thinking Ned Beatty

Mon, 12/14/2015 - 15:45 | 6922716 wmbz
wmbz's picture

Not one thing to worry about... Jack's got your back!

NIRP! '

Full Retard...All systems go! Warp Factor 10!

Mon, 12/14/2015 - 15:46 | 6922717 mtndds
mtndds's picture

Its TRANSITORY people.  ITS ALL TRANSITORY.  The Federal Reserve said so.  Dont worry.  Those assholes at the Federal Reserve have our backs.  Nothing bad will happen.

Mon, 12/14/2015 - 15:54 | 6922753 buzzsaw99
buzzsaw99's picture

ah, blackrock, you beneficent bastard.

Mon, 12/14/2015 - 19:08 | 6922771 Francis Marx
Francis Marx's picture

I told people to get out months ago.

Mon, 12/14/2015 - 16:03 | 6922805 The worst trader
The worst trader's picture

And TVIX is crashing on a high volatility day?

Mon, 12/14/2015 - 16:03 | 6922807 delivered
delivered's picture

Let's make sure we understand the correct pecking order as the economy implodes once again:

- Commodities/materials/industrial products have already gotten the message as these markets have been slaughtered over the past year. From energy/oil to base materials to the BDI, etc., the market has actually been working via supply outstripping demand and prices falling.

- Now the HY/Junk credit markets are getting the message and beginning to price accordingly. I understand the liquidity issue as being a significant factor in prices falling (as if no liquidity is available, sellers are exiting into a black hole). However let's remember the most important fact with these markets. That is, the underlying companies that act as collateral for the debt simply can't repay the loans. Energy, transport, mining, base materials, etc., they all gorged themselves on cheap/easy debt with false market assumptions. Now its time to pay the piper. So markets may actually be working again and pricing the debt for the base credit risk present within these companies.

- Next up (as pointed out by ZH) will be the IG credit markets as the real risk of debt/loans will be repriced by the market.

- Then equities will finally join this party as generally this market is often one of the last to really understand what is happening. That is, companies are going to fail as their business models can not produce enough cash flow to repay debt (let alone produce real, and not manufactured, profits).

- After this, jobs/employment will come along for the ride as companies realize that they have to slash expenses in order to survive. Jobs are the easist target but not during the holiday season. I suspect that Q1 job cut announcements will not be what the Fed wants to see/hear with the 2nd quarter being even worse.

- Finally, it will be everyone's hard assets that finally implode. From houses they never should have bought to extended car loans to you name it, once their employment situation darkens and personal cash flow drys up, in the infamous words of Yogi Berra, it will be "Deja Vu All Over Again". I suspect by the end of 2016, there are going to be some excellent bargins from individuals dumping personal assets.

So its up to the Fed or one of its proxies again, to save the day, to step in the credit markets to provide liquidity and bailout the malinvestment it has created for the past 20 years, to yet again drive another bubble in one last ditch effort to salvage 100 years of failed concepts.

Can an implosion in the HY/Junk credit markets lead to another negative economic shock, similar to 2008/2009, yes I suspect so. Would it be big enough to bring the entire system down, no I don't think so. I believe that panic/fear would have to form in the biggest credit markets in the world, that being soverign debt and FX (as remember, all currencies are a form of debt), before the entire financial system would reset. Is this coming, yes but probably not for another couple of bubble cycles as the markets finally have to accept that fiat currency and soverign debt, in relation to claims on real assets, is the financial bubble of all bubbles.

Mon, 12/14/2015 - 20:50 | 6923844 mkkby
mkkby's picture

Good analysis, but here is why I'm skeptical.

We've seen oil prices crash and take HY down a few times before.  There was a 10 year + period starting in the 80s.  It didn't spread to investment grade or stocks. Tremendous pain in Texas/Louisiana, but not really beyond the oil patch.

The difference now is old yeller is starting a rate normalization on the up side.  I suspect they will raise so gradually it will have very little effect on the overall economy.  But a head wind is not a tail wind.  Therefore, decade or more of stagflation (same as last 15 years).

For those of you hoping for easy shorts or a crash/reinvest -- sorry, not for a while.  The US may have the flu, but europe/south america/china have ebola.  Safe haven money will continue to prop up us dollar assets.

Tue, 12/15/2015 - 01:37 | 6924743 Bill Shockley
Bill Shockley's picture

So you have concluded that the Asians and the South Americans will just give us the fruits of their labor. I would study det to GDP ratios and buy currency accordingly.

 

That said we are one tactical nuke away from a global reset.

 

That's without an eco diaster.

 

And you really believe that things can continue to worsen without rebellion.

 

You live a sheltered life.

 

   bill

Mon, 12/14/2015 - 16:16 | 6922859 gatorengineer
gatorengineer's picture

Everyone forgets the European debt crisis of a few years back.... Italy went from 7% to NIRP on their bonds......

Can they do it here, dunno, but I sure wouldnt discount it.

Mon, 12/14/2015 - 16:19 | 6922866 Palladin
Palladin's picture

If you think cash sitting in a Money Market Fund is easy to withdraw at any time?

Maybe not.

The SEC in all it's wisdom to protect the managers of the Money Market Funds came up with this perverted bit of legislation. 

This means if the management of a Money Market Fund screws up and pulls a Corzine, they can lock you out for 10 business days. And also charge a fee.

Some highlights:
  • Liquidity Fees – Under the rules, if a money market fund’s level of “weekly liquid assets” falls below 30 percent of its total assets (the regulatory minimum), the money market fund’s board would be allowed to impose a liquidity fee of up to two percent on all redemptions.  Such a fee could be imposed only if the money market fund’s board of directors determines that such a fee is in the best interests of the fund.  If a money market fund’s level of weekly liquid assets falls below 10 percent, the money market fund would be required to impose a liquidity fee of one percent on all redemptions.  However, such a fee would not be imposed if the fund’s board of directors determines that such a fee is not in the best interests of the fund or that a lower or higher (up to two percent) liquidity fee is in the best interests of the fund.  Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week. 
  • Redemption Gates Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate).  To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests.  A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier.  Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period.

Mon, 12/14/2015 - 16:31 | 6922900 Bernoulli
Bernoulli's picture

In case you were always wondering and never dared to ask, Brian (I call all my guests on the show "buddy", even if it's Bill Gross) Sullivan finally explains what the real concern with ETF's is:
"The concern about the ETF market is that - correct me if I'm wrong - is that is not that the ETF market has a problem. It's that if you buy an ETF you're buying a stake in something else. The ETF is the way to get a bunch of stuff that you can - you know - would be a pain in the butt to buy a bunch of stuff seperately. The concern is, do we have the assets that the ETF represents? are they there? can they be sold? In other words, does that ETF have the stuff to back it up?"

Any questions?

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