This page has been archived and commenting is disabled.
Do High Yield Bonds Know Something Stocks Don't?
As the S&P 500 reaches new multi-year highs and VIX touches multi-year lows, there is one rather large and risk-appetite-proxying market out there that is not as excited. The high-yield bond market has seen record in-flows dropping off recently and for the last four-to-six weeks high-yield spreads, yields, and bond prices have been very flat as stocks have surged ahead. Despite US earnings yields at near-record highs relative to high-yield bond yields, we see little pick-up in LBO chatter suggesting a notable preference for higher-quality junk credit (and/or lack of belief in sustainability of earnings yields) and the recent 'dramatic' outperformance in investment grade credit is a notable up-in-quality rotation (as well as early spread-compression reaction to Treasury weakness recently) that strongly suggests less risk appetite among real money managers (given how 'cheap' high-yield appears across asset classes). Lastly, the ratio of HY bond prices to VIX is near its extreme once again, something we saw occur before the risk flares of 2010 and 2011 surrounding the end of the Fed's QE sessions.
The S&P 500 (Blue line) has stormed higher from its October lows and extended gains recently despite signals that QE3 may not be so imminent. Investment grade credit (dark red) has pushed higher with it as size and quality was preferred (and the last week or so of outperformance likely reflects the initial spread compression impact as Treasuries blew higher in yield but corporates remained bid from safety up-in-quality rotations). What is most clear is the HYG (green line) and HY (red line) have flat-lined in the last 4-6 weeks while stocks have accelerated. We have seen this pattern before and the old saw that 'credit anticipates and equity confirms' has been extremely useful a number of times over the past few years.
Here is the market moves heading into the end of QE2...obviously HY became anxious first and proved correct once again...
There are plenty of technical reasons for why HY may be struggling including negative convexity at such low yields but the slowing flows and relative decompression far outweighs the stickiness of bond prices and their callability here.
Furthermore, the ratio of HY bond prices to VIX has soared to record 'risky' highs strongly suggesting that either VIX is set to rise notably, high-yield bond prices are set to fall notably or both and these extremes have tended to occur in the lead ups to notable risk flares (around Fed implicit easing periods).
While not perfectly fungible, VIX and HY represent risk premia for extreme downside protection and there is clearly a major disconnect. Using longer-dated Volatility we get a better more realistic perspective between the two markets - once again confirming that short-dated enthusiasm is at extreme levels as even with modest rises in VIX we see the term structure steepening today.
Charts: Bloomberg
- 17671 reads
- Printer-friendly version
- Send to friend
- advertisements -





Yes. The twist is dead.
correct me if i'm wrong here. if bond yields rise, isn't that extremely bearish for PM's?
Only to a point.
When bond yields rise enough to call into question the gubbermint's ability to continue funding itself without Central Bank "assistance", PM's will resume their uptrend. With gusto.
of course. but in the meantime, wouldn't there be a huge selloff in PMs first until it becomes obvious to everyone and not just ZHers and so forth that another QE is coming?
There will be no "huge" sell off in precious metals as long as Central Bank balance sheets remain anywhere near their current size and real rates paid on bank deposits are negative. Yes, precious metals would suffer temporarily in the event of a panic liquidation ala 2008, but would recover rather quickly, just as they did in 2009.
oooh...the prospect of picking up more PMs on the cheap is getting me all hot and bothered!
With the current global monetary system clearly in its terminal phase, I think we saw the last of "cheap" precious metals back in 2002. "Cheaper", maybe, but "cheap" is over.
Might as well execute and shoot your wad or whatever it is you do.
while it's still in the 30's once they go higher, you are going to run into some VERY strong hands who will be very reluctant to sell.
Be patient. The trout will come up from under the rock well enough. Just need a big quiet back pool of water in a slow moving spot...
Slow moving spot....
In '08 cash investments ran into the dollar. There will be no run into the dollar when rates rise this time, as everyone is full aware that fiat currency is a losing asset.
MLH,
i think you're overestimating the intelligence of our "market."
A rise in rates would be extremely bullish for PMs, as it was in the early 80's. A rate rise would confuse the markets and currency would run from bonds. Where would it go? The dollar? Would it chase stocks at the indices highs? Gold would benefit from this confusion, once again, as it did in the early 80's.
If the bonds are what I think they are, I don't think there will be money there to pay them at maturity. If a town took on ... 5 mil in bonds maturing in 20 years at whatever rate... well... guess what?
Hope that 5 mil was wisely spent because you are about to have to come up with a pay off or a roll over.
I dont think banks or anyone who holds the purse is in any mood for a roll over. I sense blood in the water among the sharks.
Another round of QE is coming. They have no choice. It is QE to infinity or the economy crashes and burns.
http://davidmorganblog.blogspot.ca/
It depends on what you mean by "economy." If by "economy" you mean "banks," then you are right. Without more free money they will perish.
My definition of the "economy" is really a collection of capital goods and assets. This "economy" will thrive once the QE stops. Once the Ctrl+P, (income tax to pay for it), wars, welfare and corporate graft stops, the real economy will flourish.
I have no doubt there is another round of QE coming. There's not enough money in the world to fund these deficits.
What is with the constant 'no QE yet' idea here at ZH? Looking at the PM dials?-Ben has his price jammer on high.
Need Ben to knock at your front door with his cheesy smile and 45 degree ES chart?
The article is catching a credit-equity divergence that still has many more months to play out before any dramatic decline in equity prices. Last time in 2011 this divergence lasted 6 months before there was a sell-off in the SPX. Here we are only at the end of the first 2 months of this divergence. Watch out for shorting too early here.
Put on them Shorts, boys! (and have a swimmmmmm :))
Just doubled down on my ladders...never been cheaper to get rich quick.
VIX skews are nuts
Yes, huge contango between basically any 2nd and + month future outward. Saw lots of call buyers today, even outright, which suggets we might indeed be in for a swoon after the VIX settle on wednesday..
A major disconnect! Right, for about a decade!
Longer dated VIX gives us a better perspective? Do high yield bonds know something? Good grief.
Okay...Cdad must truly have tumbled deep down the rabbit hole because FRONT MONTH VIX FUTURES CONTRACTS OPENED UP 35%+ this morning. Ehem...
Bueller...Bueller....
They rolled the display month from March to April because the March contract is almost done. It made it look like a huge change but nothing really changed.
Futures roll, dill-snip.
yeah, my VXX calls got a$$hammered.
apparently no one is too worried about anything, market-wise, these days.
Jump on the market rally before the twist runs out...
It does seen there's no risk in the equity markets. And the path of least resistance is upwards.
One thing that is different this time: Ben has to get his boss re-elected, at any cost. Little chance the Manipulated equity market will change attitude, let alone direction.
Yeah. Okay. Barack Obama is the "boss" of Ben Bernanke.
Just as George W. Bush was the "Decider".
Take another hit. Apparently, the first one didn't quite do its job.
yeah and i'm not sure if the bernank gives a shit whether obama is reelected because he knows that anyone but paul is pretty much bought and paid for and they all serve the same bullshit status quo.
DO technicals matter until after November?
Seriously, when primary dealers can literally make a years' worth of interest payments to the Fed in an afternoon (like this afternoon for example) by just hft leap-frogging, does any of it matter. I am truly beginning to believe that we are in for a much longer ride up than we imagined.
The way I would state this is simply "how can the market go down when the government can front-run itself?"
In other words, remove the Fed's bid on teasuries and show me the fucking recovery and true cost of creating capital.
Didn't technical analysis die about the same time that fundamentals vanished into the great Black Hole?
Short answer, sometimes. Long answer, BTFD.
Stocks are purchased by Benny to create as American Bonds to be sold in the Bond market.
That's why they both go UP, and UP, and UP, and UP, and UP........
Bonds never lie....
but they do go on forever...
1.Dr. No (1962-Sean Connery)
2.From Russia With Love (1963-Sean Connery)
3.Goldfinger (1964-Sean Connery)
4.Thunderball (1965-Sean Connery)
5.You Only Live Twice (1967-Sean Connery)
6.On Her Majesty's Secret Service (1969-George Lazenby)
7.Diamonds Are Forever (1971-Sean Connery)
8.Live and Let Die (1973-Roger Moore)
9.The Man with the Golden Gun (1974-Roger Moore)
10.The Spy Who Loved Me (1977-Roger Moore)
11.Moonraker (1979-Roger Moore)
12.For Your Eyes Only (1981-Roger Moore)
13.Octopussy (1983-Roger Moore)
14.A View to a Kill (1985-Roger Moore)
15.The Living Daylights (1987-Timothy Dalton)
16.Licence to Kill (1989-Timothy Dalton)
17.GoldenEye (1995-Pierce Brosnan)
18.Tomorrow Never Dies (1997-Pierce Brosnan)
19.The World is Not Enough (1999-Pierce Brosnan)
20.Die Another Day (2002-Pierce Brosnan)
21.Casino Royale (2006-Daniel Craig)
22.Quantum of Solace (2008-Daniel Craig)
23.Skyfall (November 2012-Daniel Craig)
yeah but after Connery, it was pretty diluted.
Connery was finished in "Diamonds." The first two Moore films hold up pretty well.
Pretty woman, fast gun and techno toy to ride around in.
Always a good recipe.
Of course they do.
They know that the bond market is 11 times bigger than the stock market.
They know that the USA based Primary Dealers are in a internal war as to how to avoid to be the 4th to collapse since they've been buying up the stock market in order to disallow their holdings to fall in price. Remember Bear Stearns, Lehman and MF global?
Does it ring a bell?
All sovereign debt is now on life support, especially after the Greek fiasco. Next in line: Spain, Portugal, France and Belgium. Perhaps even the UK?
Don't look to historical corelations to guide you here. The Fed and the squid know them all and are actively manipulating them back to synchronicity. Last week the Russel was lagging and that was "evidence" that the bull run was weakening. Look at it today. This HY story is gaining traction, look for HY and the HYG ETF to start moving strongly to the upside. We are in a full blown market melt-up with all CBs on deck for maximum manipulation capability. TPTB have decided that this is the only way forward that might work and they are doubling down.
Yep, they have until november or the next debt ceiling breach. Government frontrunning itself. Sad really.
"correct me if i'm wrong here. if bond yields rise, isn't that extremely bearish for PM's?"
Not necessarily, see 2008. I ran some quick chart comparisons to see what the recent correlation had been, but volatility in PM's make the charts far too noisy.
Off topic: ZH recently ran a chart comparing S&P500/US$ vs. S$P500/Gold. I didn't save the link or chart. If anyone can direct me to it, it would be greatly appreciated.
Thanks in advance
the rubber band stretches and snaps back, the rubber band stretches and snaps back......
Ding Dong the TWIST is Dead...Which old Twist? Bernanke's Twist!
For no one in particular and everyone in general, I'm tracking a VIX trade in zh articles referring to VIX on a trade day for possible future use. At another 52-week low, I increased my VIX position from 20% to 30% of target holdings today.
A reverse engineering of this trade may make an interesting read for some members some day. In the meantime, I sheepishly apologize that this post contains little to no educational or entertainment value today.
Are you in futres for VIX or ETF's? The VIX etfs don't seem to do anything but go down.
Off topic, but anyone have any ideas for selling covered calls to make a few bucks? I have had "success" selling 'C' calls. I call it "success" because the stock has risen above enough to cap my gains but I sleep better at night having some insurance.
I would like to thank you for the efforts you have made in writing this article. I am hoping the same best work from you in the future as well. In fact your creative writing ability has inspired me.
blue jackets
bomber jacket
smoking jacket
straight jacket
snowboard jackets
winter jackets