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

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
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?

Manthong's picture

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

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.

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.

onebir's picture

That makes sense - you're one thoughtful 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). 

The Wizard of Oz's picture


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!

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!"

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.

NotApplicable's picture

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

Lost Wages's picture

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

Dr. Engali's picture

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

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.

NotApplicable's picture

"Investment grade corporate bond?"

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

disabledvet's picture

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

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...


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.

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.

poor fella's picture

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

Everything else is.


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?