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Do High Yield Bonds Know Something Stocks Don't?

Tyler Durden's picture





 

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

 


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Mon, 03/19/2012 - 13:05 | Link to Comment Dr. Engali
Dr. Engali's picture

Yes. The twist is dead.

Mon, 03/19/2012 - 13:12 | Link to Comment Troll Magnet
Troll Magnet's picture

correct me if i'm wrong here. if bond yields rise, isn't that extremely bearish for PM's?

Mon, 03/19/2012 - 13:21 | Link to Comment Bam_Man
Bam_Man's picture

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.

Mon, 03/19/2012 - 13:29 | Link to Comment Troll Magnet
Troll Magnet's picture

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?

Mon, 03/19/2012 - 13:34 | Link to Comment Bam_Man
Bam_Man's picture

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.

Mon, 03/19/2012 - 13:37 | Link to Comment Troll Magnet
Troll Magnet's picture

oooh...the prospect of picking up more PMs on the cheap is getting me all hot and bothered!

Mon, 03/19/2012 - 13:43 | Link to Comment Bam_Man
Bam_Man's picture

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.

Mon, 03/19/2012 - 14:16 | Link to Comment HungrySeagull
HungrySeagull's picture

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....

Mon, 03/19/2012 - 13:42 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

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.

Mon, 03/19/2012 - 14:02 | Link to Comment Troll Magnet
Troll Magnet's picture

MLH,

i think you're overestimating the intelligence of our "market."  

Mon, 03/19/2012 - 13:40 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

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.

Mon, 03/19/2012 - 14:18 | Link to Comment HungrySeagull
HungrySeagull's picture

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.

Mon, 03/19/2012 - 13:21 | Link to Comment Silver Bug
Silver Bug's picture

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/

Mon, 03/19/2012 - 13:26 | Link to Comment Seize Mars
Seize Mars's picture

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.

 

Mon, 03/19/2012 - 13:32 | Link to Comment Dr. Engali
Dr. Engali's picture

I have no doubt there is another round of QE coming. There's not enough money in the world to fund these deficits.

Mon, 03/19/2012 - 14:24 | Link to Comment ActionFive
ActionFive's picture

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?  

Mon, 03/19/2012 - 13:36 | Link to Comment slaughterer
slaughterer's picture

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. 

Mon, 03/19/2012 - 13:06 | Link to Comment TradingJoe
TradingJoe's picture

Put on them Shorts, boys! (and have a swimmmmmm :))

Mon, 03/19/2012 - 13:29 | Link to Comment JPM Hater001
JPM Hater001's picture

Just doubled down on my ladders...never been cheaper to get rich quick.

Mon, 03/19/2012 - 13:06 | Link to Comment -1Delta
-1Delta's picture

VIX skews are nuts

Mon, 03/19/2012 - 20:00 | Link to Comment ZeroPower
ZeroPower's picture

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..

Mon, 03/19/2012 - 13:06 | Link to Comment monopoly
monopoly's picture

A major disconnect! Right, for about a decade!

Mon, 03/19/2012 - 13:10 | Link to Comment Cdad
Cdad's picture

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.... 

Mon, 03/19/2012 - 13:12 | Link to Comment sablya
sablya's picture

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.

Mon, 03/19/2012 - 13:26 | Link to Comment Seize Mars
Seize Mars's picture

Futures roll, dill-snip.

Mon, 03/19/2012 - 16:40 | Link to Comment Whatta
Whatta's picture

yeah, my VXX calls got a$$hammered.

 

apparently no one is too worried about anything, market-wise, these days.

Mon, 03/19/2012 - 13:09 | Link to Comment carbonmutant
carbonmutant's picture

Jump on the market rally before the twist runs out...

Mon, 03/19/2012 - 13:13 | Link to Comment crawl
crawl's picture

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.

Mon, 03/19/2012 - 13:24 | Link to Comment Tsar Pointless
Tsar Pointless's picture

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.

Mon, 03/19/2012 - 13:33 | Link to Comment Troll Magnet
Troll Magnet's picture

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.  

Mon, 03/19/2012 - 13:18 | Link to Comment LawsofPhysics
LawsofPhysics's picture

DO technicals matter until after November?

Mon, 03/19/2012 - 13:25 | Link to Comment Village Smithy
Village Smithy's picture

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.

Mon, 03/19/2012 - 13:37 | Link to Comment LawsofPhysics
LawsofPhysics's picture

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.

Mon, 03/19/2012 - 14:24 | Link to Comment Vince Clortho
Vince Clortho's picture

Didn't technical analysis die about the same time that fundamentals vanished  into the great Black Hole?

Mon, 03/19/2012 - 13:22 | Link to Comment Crispy
Crispy's picture

Short answer, sometimes. Long answer, BTFD.

Mon, 03/19/2012 - 13:27 | Link to Comment Sandy15
Sandy15's picture

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........

Mon, 03/19/2012 - 13:28 | Link to Comment jcaz
jcaz's picture

Bonds never lie....

Mon, 03/19/2012 - 13:31 | Link to Comment JPM Hater001
JPM Hater001's picture

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)

Mon, 03/19/2012 - 13:34 | Link to Comment Troll Magnet
Troll Magnet's picture

yeah but after Connery, it was pretty diluted.

Mon, 03/19/2012 - 13:43 | Link to Comment slaughterer
slaughterer's picture

Connery was finished in "Diamonds."  The first two Moore films hold up pretty well.

Mon, 03/19/2012 - 14:19 | Link to Comment HungrySeagull
HungrySeagull's picture

Pretty woman, fast gun and techno toy to ride around in.

Always a good recipe.

Mon, 03/19/2012 - 13:37 | Link to Comment ekm
ekm's picture

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?

Mon, 03/19/2012 - 13:37 | Link to Comment apberusdisvet
apberusdisvet's picture

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?

Mon, 03/19/2012 - 13:37 | Link to Comment Village Smithy
Village Smithy's picture

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.

Mon, 03/19/2012 - 13:40 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Yep, they have until november or the next debt ceiling breach.  Government frontrunning itself.  Sad really.

Mon, 03/19/2012 - 13:38 | Link to Comment francis_the_won...
francis_the_wonder_hamster's picture

"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

Mon, 03/19/2012 - 13:40 | Link to Comment JamesBond
JamesBond's picture

the rubber band stretches and snaps back, the rubber band stretches and snaps back......

Mon, 03/19/2012 - 13:54 | Link to Comment TradingSIZE
TradingSIZE's picture

Ding Dong the TWIST is Dead...Which old Twist? Bernanke's Twist!

Mon, 03/19/2012 - 18:50 | Link to Comment bluebare
bluebare's picture

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.

Tue, 03/20/2012 - 12:39 | Link to Comment Chappy
Chappy's picture

Are you in futres for VIX or ETF's?  The VIX etfs don't seem to do anything but go down.

Tue, 03/20/2012 - 12:42 | Link to Comment Chappy
Chappy's picture

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.

Wed, 03/21/2012 - 00:26 | Link to Comment jgibs330
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