"Not Transitory" - The Year In Junk Bonds

Tyler Durden's picture




 

Submitted by Jeffrey Snider via Alhambra Investment Partners,

The most important outbreak or story of 2015 had to have been the junk bond reversal. It combined all the major elements of what investors and economic agents are both fearing and, at one point in the past anyway, hoping. It is the confluence of finance, “dollars”, liquidity and economics with or without recovery and the best scenario. The FOMC raising rates is supposed to confirm the brightest outlook, which would only lead to more extension in the credit cycle, and yet junk bonds traded as if the worst were only just around the corner. It isn’t so much the selloff, though that is obviously important, but rather how increasingly the selloff is being treated as permanent.

It is the expression of an obvious and apparently durable shift in risk perceptions, and I think it the most significant development. You can see it clearly in the changes this year to last. After the selloffs in October and December 2014, junk was bid in clear bargain hunting patterns of behavior. The rebound after last December lasted months and was quite significant even if it didn’t quite bring prices and yields quite back to the full comfort of prior complacency.

This year, each discrete selloff was met instead by listlessness and palpable uninterest, including the past week or so after what was undoubtedly the most intense selloff yet. That leaves the waves of selling only pushing the idea of the continuation in the credit cycle further and further remote; bringing instead the sense of doom closer and closer. This alteration in outlook and perception really could not be more unmistakable:

ABOOK Dec 2015 Junk Year Lev Loans ABOOK Dec 2015 Junk Year CCC ABOOK Dec 2015 Junk Year Master II

It is not your typical market behavior; not at all the “wall of worry” that represents healthy skepticism and functional fundamental discounting but rather a “get the hell out of Dodge” and stay out.

ABOOK Nov 2015 Junk Worse Total Issuance

 

Not transitory at all, then, rather a paradigm shift that isn’t yet even close to a new steady state. Welcome to 2016.

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Fri, 01/01/2016 - 19:25 | 6986697 RiverRoad
RiverRoad's picture

Are people still clapping for Tinkerbell?  Pretty soon we'll hear the sound of one hand clapping.

Fri, 01/01/2016 - 20:02 | 6986794 zorba THE GREEK
zorba THE GREEK's picture

Shouldn't the word "junk" before the word bond give you a clue as to the potential value of said investment?

Wake up and smell the coffee! Maybe if they were called "crap" bonds people would catch on.

Fri, 01/01/2016 - 19:28 | 6986701 jm
jm's picture

Look at iBoxx and not CCC.

Spread blowouts are in energy and materials.

Spreads are mean-reverting like VIX.

Loans are testing out their legs in an time of high disintermediation. Thanks Basel III.

If loans and credit are in a world-shattering "paradigm shift"what do you think will happen to common equity? 

Sat, 01/02/2016 - 17:18 | 6988932 herkomilchen
herkomilchen's picture

Common equity of HYG basket companies has fallen 10% this year, just like the bonds.

Fri, 01/01/2016 - 20:02 | 6986795 Dragon HAwk
Dragon HAwk's picture

We can pay you the interest.. but we have to deduct it from the value of the Money you lent us...

Fri, 01/01/2016 - 20:13 | 6986821 Spiritof42
Spiritof42's picture

As the collapse spreads, junk bonds would be the natural entry point into financials.

Fri, 01/01/2016 - 20:25 | 6986847 gatorengineer
gatorengineer's picture

Energy and commodity related is what has driven this.  So far its been contained with no defaults.... can that last?  If we get oil back to say 50, there could be a nice snap back here.

Sat, 01/02/2016 - 03:16 | 6987445 Chris88
Chris88's picture

Zerohedge: STOP the nonsense of confusing HY bonds with leveraged loans.  US senior secured loans are completely different from HY bonds, with a recovery rate on delinquencies (over a roughly 18 year period) literally about 30 percentage points over junk bonds.  Leveraged loans actually have covenants (except for the ridiculous covenant-lite issuance we've seen in the broadly synidcated market since 2013) and assuming the first lien portion is modestly leveraged with net debt/EBITDA < 4.0x the debt is usually junior only to a bank revolver.

Really pisses me off the first chart is the leveraged loan index.  While the index has undoubtedly gotten hit and loan funds are experiencing heavy withdrawals this should not be lumped in with junk bonds.  Volume is down heavily (down about 30% Y/Y), with the obvious culprits (energy and mining) leading the way but the prospects for loans are significantly better than bonds and the two should be addressed seperately.

Sat, 01/02/2016 - 04:19 | 6987490 _ConanTheLibert...
_ConanTheLibertarian_'s picture

ZH claims this to be the most important story of the year? This wasn't even in the Greatest Hits article!

What does that mean? Perhaps the readers are smarter than ZH and Chris88 is right?

I don't know but this is quite funny/peculiar actually.

Sat, 01/02/2016 - 17:21 | 6988670 herkomilchen
herkomilchen's picture

Thanks for the info.  Indeed, bond priority and asset base of the company make a world of difference with whether one is left holding the bag when a company goes south.

ZH will sometimes skip over material considerations like this when they temper the impact of the message.  Poetic license of a sort.  Except this isn't poetry.

Simple info on high-yield vs. leveraged and on evaluating covenants:

http://marketrealist.com/2014/02/comparing-leveraged-loans-versus-high-y...

http://learnbonds.com/7397/bond-covenants/

Sat, 01/02/2016 - 10:04 | 6987856 Bilderberg Member
Bilderberg Member's picture

Many High yield bonds have indeed been destroyed, mostly of course from the energy sector. But liquidity in other sectors are suffering. Two huge names marching to the grave yard in 2016 are Chesapeake Energy and US Steel. They need things to turn around big time!

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