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HYG Plummets The Most In Almost 2 Months As Credit Leads Risk Lower (Again)

Tyler Durden's picture


The message of the market has been very clear the last week or two and we have been actively discussing it - the hope that was priced into equity markets is being discounted back to the reality that was always priced into credit markets. HYG, increasingly liquid, accessible, and actively traded has become the weapon of choice for hedgers and shorts and once again today it dramatically underperformed. IG credit also underperformed as we suspect the relatively low cost of carry made it an attractive macro-overlay into a long weekend of possibilities. Commodities in general converged back on the inverse of the USD performance of the week, down around 1.5% (with the exception of Copper which is -4% on the week as China hopes fade). Equity weakness was generally supported to the downside by CONTEXT's broad basket of risk assets - especially as TSYs rallied aggressively in the afternoon following the record 7Y auction. AUD remained the ugly duckling of the week in FX land (as carry was unwound) but EUR's slide was the biggest driver of DXY's strength as it gained around 1.3%. Evidently very few wanted to go home long into this weekend and ES dumped into the close ending the week -4.5% or so with a major volume surge at the very end.

This week has seen day after day of heavier and heavier selling pressure in HYG as we suspect the virtuous circle of forcing creation units to buy secondary bonds is being unwound in a hurry (discussed here and here more specifically). As we perfectly described would happen in this post on 10/24, HYG's underperformance relative to HY spreads and more importantly stocks was mirroring the surges we saw on the way up as the ETF was stuffed. To get a sense of the 230bps underperformance on the day (which ended 160bps with the rapid sell-off into the close), we use the SPY Arb model (which can be tracked in real-time here) to account for the non-linearities and empirical relationship - the point is - this was a major move in HYG and we have only seen the start of the redemption of shares outstanding in this ETF. Keeping an eye on secondary HY bond volumes, advance-decline, and pricing will be critical in the next few days.


Today's significant underperformance of IG also suggests hedging was a big driver of risk concerns (and the PMI filing likely meant the need to hedge with whatever was liquid in credit derivative markets probably exaggerated the move).

HYG's dramatic sell-off the last few days has caught it up to HY credit spread performance very rapidly and for the first time in over 4 months, shares outstanding are starting to drop. This is very worrisome, redemptions in this fund that we have noted before has been channel-stuffed with any and every HY bond that professionals couldn't (and wouldn't) offload into the secondary markets for fear of setting off avalanches, is about to be forced to sell into that very market.

Copper was adrift in disappointment as the rest of the commodity complex seemed to gravitate to the USD move this week.

TSYs rallied aggressivley after inching into the red early on in the day and notably 2s10s30s dropped like a stone as selling pressure escalated into the afternoon.


Charts: Bloomberg


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Wed, 11/23/2011 - 17:10 | 1908345 Frank N. Beans
Frank N. Beans's picture

is this what you call a big dump?


Wed, 11/23/2011 - 17:32 | 1908460 SwingForce
SwingForce's picture

Yeah, the colon blew out. 

Wed, 11/23/2011 - 23:38 | 1909355 covert
covert's picture

keep the defaults coming


Wed, 11/23/2011 - 17:11 | 1908352 Tsar Pointless
Tsar Pointless's picture

That was one hell of a dump into the close. Haven't seen one quite like that in some time.

Unless a huge rabbit is pulled out of Bullwinkle's hat between tonight and Friday morning, we could be staring at S&P 1120 Friday afternoon.

Or lower.

Wed, 11/23/2011 - 17:31 | 1908455 SwingForce
SwingForce's picture

Or higher, as PPT entered the ring at 14:26 est. with typical psuedo-capitulation bar, then things went hyper-parabolic UP and the VacTubes cracked at 15:55 and reset the sequence. The RunStop mode to new lows was activated. Ain't NOBODY left long for Friday, when they will all be chasing that bus...Dashing Dan was the logo for the Long Island RailRoad back in the '70's- he was chasing the train as it left the station.... Happy Thanksgiving folks! Being stopped out is the most relaxing way you'll spend the holiday, be thankful. Seriously.

Bullwinkle? Do you remember Felix the Cat's "bag of tricks"? Have a good one, TP.

I haven't seen 1 minute bars like that since Global Crossing went tits up, and that still holds the record.

Wed, 11/23/2011 - 17:11 | 1908355 Let them eat iPads
Let them eat iPads's picture

Happy Thanksgiving everyone!

Wed, 11/23/2011 - 17:13 | 1908370 Mike2756
Mike2756's picture

Eurobonds doa again? Especially after the Dexia fiasco.

Wed, 11/23/2011 - 17:16 | 1908376 tempo
tempo's picture

The lessons are clear...TSY downgraded, rates down...deficits higher/lower growth/supercommittee fails....rates down. Deficits don't matter, the political parties have their talking points and as long as rates decline, there will be no change, except for more spending. Another downgrade and rates will decline more. A larger deficit and rates will decline more. The lessons are clear.

Wed, 11/23/2011 - 17:28 | 1908435 James T. Kirk
James T. Kirk's picture

A larger deficit and rates will decline more. The subliminal lessons being programmed into sheeple psyche are clear.

There, fixed it for ya.

Wed, 11/23/2011 - 17:19 | 1908392 luna_man
luna_man's picture

Nope, I don't think, that turkey is gonna taste the same...


Should have bought duck! 

Wed, 11/23/2011 - 17:22 | 1908412 bmwm395
bmwm395's picture

This MKT is looking like a big turkey


Wed, 11/23/2011 - 17:30 | 1908448 gigeze787
gigeze787's picture

Could someone please explain the divergence between the TLT and BND over the past week? I realize TLT is more leveraged due to average yield-to-maturity, but it seems that BND has underperformed even when taking into account YTM.

Wed, 11/23/2011 - 17:30 | 1908449 mynhair
mynhair's picture

Thanks CC and Tyler, for these posts.

Have a Happy Thanksgiving, if you celebrate it!

Wed, 11/23/2011 - 17:59 | 1908532 slewie the pi-rat
slewie the pi-rat's picture

an attractive macro-overlay into a long weekend of possibilities?

well, go for it, tyler!

Wed, 11/23/2011 - 20:33 | 1908958 WhiteNight123129
WhiteNight123129's picture

The ugliest industrial commodity is ... Iron ore, the exposed to China's fiat indulged growth "miracle". Specially the one from Brasilwhich suffers from a large transportation cost disadvantage.

Wed, 11/23/2011 - 23:40 | 1909356 ToNYC
ToNYC's picture

HYG is not plain vanilla, and as a derivative, is subject to perturbations by invisible perpetrators. ETFs are more than you thought away from you, and less than you thought for you.

Thu, 11/24/2011 - 00:45 | 1909550 Ku
Ku's picture

I guess if you follow 1-min bars the close was dramatic but it don't look unusual on hourly bars or in relation to the day 

Thu, 11/24/2011 - 04:30 | 1909995 Grand Supercycle
Grand Supercycle's picture

USD selling pressure continues and the prospect of an equity xmas rally and EURUSD bullish spike returns.

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