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Is Investment Grade Issuance Driving Treasury Weakness (Again)?

Tyler Durden's picture




 

Back in March, the last time we saw a notable and relatively sustained rise in Treasury yields, we pointed out a potential driver for this 'apparent' weakness - the heaviness of investment grade corporate bond issuance. This drives relative selling pressure in Treasuries for three potential reasons: pre-emptive rate locks are positioned; managers hedge away interest-rate duration to lock in the 'spread' on the bonds as they are jig-sawed into existing portfolios; and most simply speculative rotation from Treasury bond 'cash' into new issues (thus avoiding the convexity issues associated with such low yields on existing 'secondary' bonds). As the charts below show, in March, as we noted at the time, issuance expectations (the forward calendar) were falling and we suggested Treasury yields would drop as this implicit selling pressure would also lift. While this time Gross and Singer have spurred some risk-aversion, no doubt, the IG calendar suggests a lifting of the selling pressure soon here too.

 

10Y Treasuries exhibiting similar drive higher in yield...

 

March 2012 corporate bond issuance vs Treasury yields...

 

and the current (and recent issuance) and Treasury yields...

 

So while most see Treasury weakness as a sign of that final rotation to risk assets and cheer the data, we posit that perhaps it could be merely a small reach for yield in a positive market environment for corporate bond issuance when supply is heavy and demand just as much so with fund flows staying high...

Data: Bloomberg

 

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Tue, 08/14/2012 - 15:48 | 2704842 sixsigma cygnus...
sixsigma cygnusatratus's picture

You know, this "market only goes up" business seems to be losing steam.  I wonder if they will shorten the trading day to several nanoseconds?

Tue, 08/14/2012 - 16:17 | 2704920 Silver Bug
Silver Bug's picture

Treasuries are junk, load up on gold and silver.

 

http://davidmorganblog.blogspot.ca/

Tue, 08/14/2012 - 16:23 | 2704935 Manthong
Manthong's picture

Instead of IG, why don't they change the symbol to PL (Ponzi Lite)?

Tue, 08/14/2012 - 16:22 | 2704930 vast-dom
vast-dom's picture

Gross (and I) were very wrong before on bond bubble pop about a year ago. Do you really think Gross could be wrong AGAIN? I'd be very surprised...but then again these markets defy reality and thus sound analysis.

Tue, 08/14/2012 - 16:47 | 2704992 The Monkey
The Monkey's picture

A few weeks back, when the 30 year treasury was around 2.5%, Gross and El Erian were talking them up.  So, you would not only have been wise to buy treasuries in 2011 when Gross was selling, but also to have sold when Pimco was long and strong.

I wouldn't buy treasuries yet, but Gross doing his thing is telling you he wants to buy at higher yields, and he's doing it strategically when there is a lot of corporate issuance and uncertainty about monetary policy.  Much appreciated Bill.  The crack smokers at the Fed probably don't appreciate your buyer's strike, but I do.

Tue, 08/14/2012 - 16:58 | 2705010 onebir
onebir's picture

That makes sense - you're one thoughtful monkey :)

Tue, 08/14/2012 - 17:32 | 2705079 The Monkey
The Monkey's picture

That was a trade with a lot of cognative dissonance.  But, I did buy the 30 year @ 4.6%, and with a few swing trades, unloaded below 3%.  I unloaded Mom's 30 year treasuries when yields went to 2.5%.

Not too many obvious trades out there right now, but the 30 year treasury may again have a big rally once it becomes oversold.  That could be a while (or not). 

Tue, 08/14/2012 - 15:51 | 2704852 The Wizard of Oz
The Wizard of Oz's picture

LOOK AT THE SLOPE OF THAT FIRST CHART! THAT'S GOTTA BE BULLISH!

Tue, 08/14/2012 - 16:16 | 2704855 ACP
ACP's picture

It's on auto-pilot. Everyone just has their stops in and is letting the Fed float this pig-monkey of a market upwards while volume approaches zero.

You know, kinda like before the flash crash in May 2010.

Edit: Whaddya know, a green close! Surprise, BITCHEZ!

Tue, 08/14/2012 - 16:19 | 2704923 sixsigma cygnus...
sixsigma cygnusatratus's picture

Green close?  WTF?  You know, this reminds me of the words a wise man once spoke: "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people...ah whatever, Gold Bitchez!"

Tue, 08/14/2012 - 15:56 | 2704865 wcvarones
wcvarones's picture

Wait til you see the munis coming out of California next year after they get approved by California's stupid voters.  I'm going to have $1bn in munis on my ballot between the high school and the community college.

That is not a typo.

Tue, 08/14/2012 - 16:03 | 2704884 NotApplicable
NotApplicable's picture

And you'll have the best trained burger-flippers to show for it!

Tue, 08/14/2012 - 16:23 | 2704938 Lost Wages
Lost Wages's picture

California burger chain In-N-Out is actually better than average.

Tue, 08/14/2012 - 15:59 | 2704872 Dr. Engali
Dr. Engali's picture

Once we get past the issuance we will continue our slide to a 1% ten year.

Tue, 08/14/2012 - 16:08 | 2704899 SilverTree
SilverTree's picture

"-1% ten year." Fixed.

Tue, 08/14/2012 - 16:28 | 2704955 Lost Wages
Lost Wages's picture

Yet my wife's 401K invested in DIPSX and PTTRX will remain flat, because Bill Gross needs beer money for the golf course.

Tue, 08/14/2012 - 16:02 | 2704879 NotApplicable
NotApplicable's picture

"Investment grade corporate bond?"

Not for much longer. Thing makers are supposed to prosper by making things, not flipping paper.

Tue, 08/14/2012 - 16:02 | 2704880 disabledvet
disabledvet's picture

Great article. "stealth stagflation"? Been going on for decades...

Tue, 08/14/2012 - 17:05 | 2705021 sdmjake
sdmjake's picture

When folks start to actually lose money on Bonds [some day], and all start [try] to get out at the same time, it will be one hell of a show...

 

Tue, 08/14/2012 - 16:10 | 2704906 dmger14
dmger14's picture

My comment isn't about the article, it's about the chick with the "meh" tshirt in the left margin.  Within three years she will become a zombie who will do anything, ANYTHING for a can of soup, and I have a whole shelf full of soup for just such an occasion.

Tue, 08/14/2012 - 16:12 | 2704913 vertexa
vertexa's picture

In 2008 there were about 530 Trillion in derivatives, Now there are 3 times more!!!

There are now 1.5 quadrillion in derivatives floating around. The banks said the US government must bail them out in 2008. Now there are 3 times the derivatives as in 2008.

By the end of 2012 there might be 2 quadrillion in derivatives, I don’t see how we can continue much longer with this massive bubble being blown up by the banks. When it pops it will take down the whole world economy this time. It took only 1 trillion of bad derivatives that caused all the trouble in 2008, I see real trouble ahead in everyones future.

Tue, 08/14/2012 - 16:18 | 2704922 poor fella
poor fella's picture

Baaaah...   pretty sure it's priced in.   

Everything else is.

 

Tue, 08/14/2012 - 18:26 | 2705181 dannyboy
dannyboy's picture

Tyler, does this mean that with the MASSIVE amounts of corporate bonds due at the start of next year, and obviously going to have to re-issue them to cover payment of bonds (ponzi for everyone now?) wouldn't that mean that if this article is correct than the US bond market cannot go past the beginning of 2013 tops?

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