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Junk Contagion Spreads: Investment Grade Bonds Plunge To 2-Year Lows, Treasury Liquidity Collapses, CLOs Next

Tyler Durden's picture




 

Just as we warned, the collapse of the high-yield market has spread contagiously to the investment grade market as selling begets selling and redemptions need to be met from what you can sell, not what you need to sell (but can't). LQD (the investment-grade bond ETF) is getting hammered today, breaking to its lowest in almost 2 years.

 

As Europe closed, HYG managed to stabilize but the selling accelerated in LQD (the investment-grade bond ETF)...

 

Cracking LQD below recent lows to 2-year lows...

 

Catching down to HYG's weakness...

 

And while the storm that is rocking junk, and has now moved on to the investment grade space has not yet roiled government bond prices, it appears to already be doing a number on the liquidity of the most liquid, on the run security, the 10 Year government bonds which as the following chart from Stone McCarthy shows saw the 10-year trading "extremely special", at -235 basis points, the most negative it has been since the summer of 2014, suggesting that liquidity shortages are now manifesting themselves across all fixed income markets.

 

Finally, just as with the bundling of subprime mortgage debt, so "bundles" of corporate debt are in trouble this time...

CLOs Hammered as Energy Rout Plays Havoc With Other Debt Markets

 

The bust in commodities that’s roiling junk bonds is also taking its toll on funds that bundle loans used to finance buyouts.

 

The riskiest slices of collateralized loan obligations raised after the financial crisis plunged 9 cents on the dollar since September to about 58 cents at the end of last month, down from 84 cents a year ago, according to JPMorgan Chase & Co. Intensifying price declines in recent months have led to one of the "more challenging years in recent memory," JPMorgan analysts Rishad Ahluwalia and Jacob Kurosaki wrote in a Dec. 11 note to clients.

 

...

 

“The price declines are alarming and worrying," Ahluwalia, JPMorgan’s head of global CLO research, said in a telephone interview.

Finally, why is the contagion spreading? Because as we noted earlier today, when the dreaded "gates" arrive you sell what you have to: "One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash. Investors end up liquidating the good ones and are forced to keep the bad ones"

 

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Mon, 12/14/2015 - 14:21 | 6922306 junction
junction's picture

Party time! Let's watch the fireworks.

Mon, 12/14/2015 - 14:43 | 6922435 Money Counterfeiter
Money Counterfeiter's picture

QE 3 tr.  Moar!

Mon, 12/14/2015 - 14:47 | 6922462 major major maj...
major major major major's picture

We can grow out of it.   Right?

Mon, 12/14/2015 - 14:49 | 6922467 Captain Debtcrash
Captain Debtcrash's picture

Call it what it is a possible CRITICAL MASS DEFAULT!

Mon, 12/14/2015 - 15:21 | 6922620 38BWD22
38BWD22's picture

 

 

I read, a long time ago here at ZH, that the US Treasuries market is much bigger and more important than STOCKS.

The 10-Year is down hard today.

Beware.  Bring some of your assets closer to your own hands.

Mon, 12/14/2015 - 18:07 | 6923271 eatthebanksters
eatthebanksters's picture

So the money that can escape goes elsewhere...some of it pumping up the equity bubble...Wow, this is not going to end well when the musical chairs stop.

Mon, 12/14/2015 - 14:50 | 6922477 El Oregonian
El Oregonian's picture

More like "We can Groan out of it"...

Mon, 12/14/2015 - 15:00 | 6922524 NoDecaf
NoDecaf's picture

Burn baby burn

Mon, 12/14/2015 - 15:07 | 6922561 mtndds
mtndds's picture

C'mon guys, you all know this is TRANSITORY.  Janet Yellen even said so.  When HOUSING PRICES take a shit is when I know things are getting serious.  Until then its PARTY TIME!!

Mon, 12/14/2015 - 19:43 | 6923621 mkkby
mkkby's picture

And housing prices won't drop quickly unless rates rise rapidly, as in several percent in say 2 years.  What ever the fed decides this week, any increases will be VERY VERY gradual.

Mon, 12/14/2015 - 15:08 | 6922567 Slurm
Mon, 12/14/2015 - 14:59 | 6922522 MalteseFalcon
MalteseFalcon's picture

Look!

GREEN SHOOTS!!!

 

Hah, made you look.

Mon, 12/14/2015 - 15:23 | 6922589 hobopants
hobopants's picture

Well this looks promising. Methinks the selling in gold and silver may not be business as usual, Methinks some up high are selling the kitchen sink to stay afloat.

Hold fast...

Mon, 12/14/2015 - 15:34 | 6922667 NEOSERF
NEOSERF's picture

As I remember it happened in 2008/9 as well...as ZH just pointed out, everything good gets liquidated to try to prop up the bad until then it becomes just liquidate everything to try to get to the sidelines with any kind of cash you can.

Mon, 12/14/2015 - 19:47 | 6923631 mkkby
mkkby's picture

They didn't say that AT ALL.  When you have a margin call, cash must be raised somehow. Now.

The illiquid junk bonds that got you in trouble cannot be sold -- either no bids or very low.  So you have to keep the junk and sell your good stuff.

Mon, 12/14/2015 - 14:21 | 6922309 DirkDiggler11
DirkDiggler11's picture

Quick, send the little Dutch Boy Janet Yellin' to put another appendage in the dike....

Mon, 12/14/2015 - 14:29 | 6922364 Cautiously Pess...
Cautiously Pessimistic's picture

I think you spell it DYKE, not di....  oh wait, you meant like a wall that holds back water.  I thought you were talking about.... oh, nevermind.

 

Mon, 12/14/2015 - 14:21 | 6922313 _ConanTheLibert...
_ConanTheLibertarian_'s picture

This is getting ugly real fast. They have lost control.

Mon, 12/14/2015 - 14:28 | 6922360 Cangaroo.TNT
Cangaroo.TNT's picture

If 8 years of ZIRP & NIRP, nearly if not 100 interest rate cuts, and outright panic, flipflopping and lies by the world's central bankers has taught me anything, it's that TD & ZH is wrong and everything is A-OK.

Mon, 12/14/2015 - 15:36 | 6922676 debtor of last ...
debtor of last resort's picture

First slowly, then suddenly.

Mon, 12/14/2015 - 15:40 | 6922691 NEOSERF
NEOSERF's picture

Need to turbocharge the "whatever it takes speech" and have it ready...perhaps a mash-up of "Make No mistake about it" and "We have the Right Stuff" will set this on an up course for another 4 years?

Mon, 12/14/2015 - 14:24 | 6922327 U4 eee aaa
U4 eee aaa's picture

It will be interesting to see how they fit all those elephants through those teeny, tiny volume doors.

Time for the penny bids folks. Anyone have some good penny bid candidates for when this all begins to panic flush?

Mon, 12/14/2015 - 14:27 | 6922354 Winston Churchill
Winston Churchill's picture

That door is to the elevator shaft.

Mon, 12/14/2015 - 15:25 | 6922626 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Oh yes! "The Towering Inferno" comes to my mind. Still one of the best disaster movies IMHO.

Mon, 12/14/2015 - 19:52 | 6923648 mkkby
mkkby's picture

@U4:

Some resting bids 14.9% below market.  When the HFTs dropped all bids and flash crashed, didn't the 15% or larger drops get cancelled?

Mon, 12/14/2015 - 14:29 | 6922358 Bastiat
Bastiat's picture

Bring out the gimp (Yellen), again!

Mon, 12/14/2015 - 14:32 | 6922375 nmewn
nmewn's picture

Timmy Geithner, where is Timmy Geithner?! He's the only one who can save us now!!!...lmao!

Mon, 12/14/2015 - 15:26 | 6922642 More Ammo
More Ammo's picture

South Park does it best...

https://www.youtube.com/watch?v=cTl762MuXyc

 

Mon, 12/14/2015 - 14:34 | 6922389 Bastiat
Bastiat's picture

PPT lifting offers like Loius and Billy Ray?

Mon, 12/14/2015 - 14:39 | 6922397 Francis Marx
Francis Marx's picture

My yesterday comment questioned if the BB bonds will soon follow, being the rating agencies are corrupt. (manty BB really being CCC)

Mon, 12/14/2015 - 15:24 | 6922630 firstdivision
firstdivision's picture

AAA as well, but who cares, its just  money.

Mon, 12/14/2015 - 14:37 | 6922405 assistedliving
assistedliving's picture

and on the other side WMT confirms @ $59.  Six months ago my JPM Acct Mgr said i had to buy at $70 cuz $80 a lock by Y/E

Mon, 12/14/2015 - 14:43 | 6922438 Bill of Rights
Bill of Rights's picture

Thank god the FED has $4 trillion laying around to rescue this mess...Oh wait.

Mon, 12/14/2015 - 14:55 | 6922508 Bastiat
Bastiat's picture

They do "have this thing called a printing press," to quote the great Bernankster.

Mon, 12/14/2015 - 15:20 | 6922556 Dr. Spin
Dr. Spin's picture

This fits the next three days perfectly.

Welcome to the dark carnival.  The Great Milenko: (< 2 minutes)

https://www.youtube.com/watch?v=M3SPIiS1rjg&list=PLR4tUHo6RuWgP1bpBf84Iy...

Thanks to the Insane Clown Posse

PLAY LOUD!

Spoctor Din

Mon, 12/14/2015 - 15:03 | 6922535 Bush Baby
Bush Baby's picture

They have their phone and their print button

Mon, 12/14/2015 - 14:45 | 6922447 katchum
katchum's picture

So are you saying the bond bubble is starting to implode?

Mon, 12/14/2015 - 14:46 | 6922455 Dr. Engali
Dr. Engali's picture

This is not a liquidity problem, it's a pricing problem. The fed has distorted prices to the point that there are no actual buyers at these prices. There is plenty of liquidity if markets are allowed to find their natural bottom.

Mon, 12/14/2015 - 14:50 | 6922479 Bill of Rights
Bill of Rights's picture

Russia is not playing in the " GLOBAL " sand box so the artificial suppression is boiling over for sure.

Mon, 12/14/2015 - 15:19 | 6922611 kralizec
kralizec's picture

Many natural bottoms are hurting...most are not yet aware of it.

Mon, 12/14/2015 - 14:50 | 6922473 saveUSsavers
saveUSsavers's picture

The media goon parade of Fed "ONE AND UNDONE" to the rescue?

Mon, 12/14/2015 - 14:50 | 6922480 I AM SULLY
I AM SULLY's picture

Didn't Ben Bernanke "save the world" before?

(maybe he can save us again?)

(and give us a reach-around ...)

Mon, 12/14/2015 - 14:54 | 6922494 Bastiat
Bastiat's picture

Maybe Paulson can come up with 3-page coup document granting absolute monetary power and immunity--hell just use the old one and change the dates.

Mon, 12/14/2015 - 15:01 | 6922527 Lost in translation
Lost in translation's picture

There are a lot and I man a LOT of crooked bankers, politicians, and freeloading do-nothings that will have to be wiped off the earth via economic collapse or war - or BOTH - before anything will ever get any better.

I'm not a religious guy but isn't that what happened with the Flood?  God looked and saw only assorted Jamie Dimon's and George-Soros-types, and decided to reboot creation.  Once the bad apples were gone, things started looking up, relatively speaking.

This present, evil world shouts to the Heavens for a massive wipe-out/clean-up/start over.  The scum among us can't be reformed, and will never change their ways.

Sorry but there it is.

Mon, 12/14/2015 - 15:09 | 6922573 Hapte
Hapte's picture

Satan is real.

Mon, 12/14/2015 - 15:25 | 6922640 Wahooo
Wahooo's picture

Who needs Satan when you have giys like Dimon and Blankfein?

Mon, 12/14/2015 - 15:41 | 6922696 Hapte
Hapte's picture

From whence is their power derived?

Mon, 12/14/2015 - 15:48 | 6922731 MillionDollarAnus
MillionDollarAnus's picture

Finance majors and accounting gimmicks do not equal satan. Go talk about the devil on a religous forum where someone cares.

Mon, 12/14/2015 - 15:50 | 6922738 Hapte
Hapte's picture

Where might I find this "religous" forum please?

Mon, 12/14/2015 - 16:30 | 6922912 jcdenton
jcdenton's picture

No, just evil men ..

But from whence evil men come?

This planet is roughly 498 years away from a most important anniversary ..

http://www.truecovenanter.com/truelutheran/luther_trade_and_usury.phtml

Think you can express things better than this Augustinian monk? (Who so happened to be also a trained secular lawyer)

Mon, 12/14/2015 - 16:22 | 6922879 jcdenton
jcdenton's picture

Yes and no ..

Just let the quads in derivatives unravel ..

It will flush out everything ..

The Nephilim (Titans / Giants) were satanic-human hybrids. Some do think the Sheldon Adelsons et al do have alien DNA. An entire different discussion. (See Dr. Michael S. Heiser)

 

To end this on an upbeat ..

https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp (Read Me First)

Perhaps a bit more on the 210+ days side of the spectrum, but it did happen before years end ..

Now time for some healing ..

Mon, 12/14/2015 - 15:09 | 6922572 Justin Case
Justin Case's picture

So a rate hike to save face and QE to save banks? Glad to see that the money masters have full control over the planets destiny. It's where we're headed that concerns me.

Mon, 12/14/2015 - 15:10 | 6922577 FranSix
FranSix's picture

This is not the government bond market disaster you were thinking of. /JEDI mind trick

Mon, 12/14/2015 - 15:23 | 6922627 markar
markar's picture

Junk is the new subprime

Mon, 12/14/2015 - 15:44 | 6922682 lakecity55
lakecity55's picture

"any American who gets SS will be required to Give Up their Gunz."
Imam Barry

"In Indonesia, where I come from, there is no such thing as Due Process.

Therefore, Americans will give up this Right., because I am a Constitutional Lawyer."

Michele and I cannot wait to put body parts of YT Americans on or Lenin Tree in December!"

Mon, 12/14/2015 - 15:48 | 6922734 lakecity55
lakecity55's picture

Just to think there are some Americans who believe they have more education and knowledge than me is absurd!

I may not speak Austrian or know what a Corpse-Man is, but I know the English Language! I learned all I need to know in the First Grade in Indonesia!

Mon, 12/14/2015 - 15:26 | 6922641 yogibear
yogibear's picture

Fed's going to double QE3 with QE4.
Their balance sheet goes from $4.5 trillion to $9 trillion next couple of years.

It's never payback the money just print down the debt.

Mon, 12/14/2015 - 15:35 | 6922675 lakecity55
lakecity55's picture

"We must have a One - World Control under the B for IS."

"All currencies are Suspended TFN."

Mon, 12/14/2015 - 16:07 | 6922818 Catullus
Catullus's picture

How hard would a downgrade of us treasuries hurt right now?

That's how you know it's rigged.

Mon, 12/14/2015 - 16:08 | 6922827 wmbz
wmbz's picture

Perfect timing... No rate hike for you!

Data dependant!

Mon, 12/14/2015 - 16:13 | 6922851 antidisestablis...
antidisestablishmentarianismishness's picture

Luckily the "safe haven" pet rock will protect us

Mon, 12/14/2015 - 19:09 | 6923468 kelley805
kelley805's picture

J.P. Morgan analysts wrote that the three best leading indicators for recession have been credit spreads, the shape of the yield curve and profit margins.

Here are some signs of a coming recession.

1. Investors in high-yield bonds are expecting to see their first negative return since the start of the credit crisis in 2008.

http://www.marketwatch.com/story/deteriorating-junk-bonds-flash-warning-signs-for-stocks-2015-12-07?dist=afterbell

2. Factory orders continue to drop

http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row

3. Default risk spikes

http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high

4.  M&A set record

http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/  

5. Iron ore prices tumble

http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30

6. Baltic dry shipping index tumbles

http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19

 

Here is how to prepare.

http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

 

Here is how to get your mind off this stuff.

http://michaelekelley.com/category/humor/

 

Good luck!

Mon, 12/14/2015 - 22:43 | 6924288 hedgiex
hedgiex's picture

Sell the good and forced to keep the bad is the formation of toxic waste. It needs a massive liquidity pump to arrest the trend and Fed is signalling other wise. As for the investment grade bonds, decline to past 2 year level is still a juice.

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