One Of Worst Monthly Sell Offs In High Yield Market's 25 Year History Implies "100% Probability Of Mild Recession"

Tyler Durden's picture

More flashing red recessionary indicators are coming courtesy of the largely ignored High Yield market, which following a 5.3% decline is, as Bank of America (itself ironically contributing substantially to the blow out) says, is shaping up to be "among the worst months in the HY market's 25 year history, in a bad company of post-Lehman, post-WorldCom, post-9/11, and post-Russia sell-offs. The difference of course is that we did not have the largest bankruptcy in history taking place (LEH or WCOM shared that title at a time), no terror attack, and no outright sovereign default (Russia in Aug ’98). What we did have however, is a global risk-off trade, sparked by concerns that this fragile environment could slip into a double-dip recession as consumer and business confidence fails to sustain repeated beating from sovereign and financial systemic risk issues." What we also did have is the near end of the modern ponzi economic model, whose viability was once again extended courtesy of a variety of sticky objects thrown at the wall with hopes one sticks. For now the obliteration has been halted, although one thing is undeniable - central planner intervention buys increasingly less and less time. We are confident that August is just the beggining of pain for not only HY, but all other asset classes. And some more ammo for those who like comparing 2011 to 2008: "Parallels are being drawn between today’s environment and that of 2008, given the degree of equity destruction that has taken place across the financial space. Financial CDS – the epitome of ’08 systemic risk – are trading at an average of 190bp in the US, within reach of Oct ’08 levels, and 240bp in Europe, well north of their ’08 wides." What do spreads imply? Nothing short of recession: "The HY index, in the meantime, has widened to 739bp as of close on Thursday, its widest level since Nov 2009. With the spread normally peaking at 1,000bps in full recessionary periods2 (1991 and 2001-02) and bottoming at 250bp in times of strong economic growth, the current level is pricing in an 80% probability of a fullblown contraction in GDP, and a 100% chance of a mild recession."

And some more disturbing observations from BAC's Oleg Melentyev:

BB-BBB spread at recessionary wides


Relative spread between BBs and BBB, which currently stands at 311bps compared to the historical average of 170bp (Figure 2). More importantly, this differential tends to peak at around 300bps in full recessionary periods (1991, 2001-02) except for 2008 market meltdown episode. In other words, judging from this particular pair, the HY market is pricing in a full-blown recession at this time, ie. there is very little downside left in this relationship, unless we get a full-blown replay of 2008, which we consider to be an unlikely development.


HY prices in a 7% default rate by this time next year


By our estimate, assuming a 30% recovery – well below recent 50%-plus readings – this market can sustain a 7% default rate over the next year and still provide investors with 270bp of excess spread – the historical average compensation over future credit losses it offered over the past 25 years (Figure 1).


Our views going forward


The risk of seeing the US and EU economies slipping into recession has increased significantly over the past few weeks and we will be watching incoming high-frequency economic data very closely as we weigh any changes to our default rate and spread forecasts. Even more importantly than econ data, which will only show the picture ex-post, it is extremely important to see recent volatility in markets and wealth destruction it brings coming to an end. Today’s worst reading on UMich Consumer Confidence index in 30yrs is a blunt reminder of dangers the uncertainty brings whether it comes from Rome, Washington, or New York, let alone when it’s all of the above.


And now, the media's spin job, should it choose to accpet it, is to spin a "mild recession" as bullish for stocks.

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sellstop's picture

We've already had the mild recession.

Precisely NOW is a good time to buy MCP.


FoieGras's picture

High Yield may be a buy around here. Certainly better outlook than equities.

pslater's picture

High yield bonds are basically plays on smaller and mid cap stocks where most of your total return comes from income rather than capital gains.  With corporate profit margins peaking three quarters ago, I'd be very careful of the HY space.  I would even suggest that this is a great time to sell HY...

Greater Fool's picture

Would stay away from convertibles as they will still be reflecting equity prices and high vols, but otherwise yes, HY is a good place to look when the tide of liquidity goes out. But only if you are willing to risk a very large mark-to-market loss if another credit shock comes down the line.

CrashisOptimistic's picture

Prices of HYG, the HY bond ETF:

1 January 2011 :  $90.29

16 Aug 2011:  $86.22     

Difference $4.07  This looks like -4.5% for the year so far at first glance

But at second glance it paid $4.06 in monthly distributins since 1 Jan, not including 1 January's payout.

This means the loss is about 1 penny year to date.  

The S&P closed 2010 at 1257 and it's 1188 today.  That's minus 5.5%.  It also pays out dividends and the yield is about 1.8% as I recall.  So 7/12 of the year is past which would be 1% of that 1.8.  

One way or another HY is outperforming the S&P. 

dcb's picture

one of the things that should have been elimated with the financial crisis is high yeild. you knew we were in a bubble and there was too much credit around when they started leveraged loans again

Sudden Debt's picture

Mild, like in a mild hart attack or mild stroke?

Long-John-Silver's picture

During or the morning after sex?

Sudden Debt's picture

if they sleep over, the morning sex is like paying rent!

And during the sex is is somehting that happens if you didn't buy them enough beers.


In Fed We Trust's picture

What does 2.3 trillion dollasrs buy you?


Just ask Donald Rumsfield in this here funny video...

Sudden Debt's picture

What does 2.3 trillion dollars buy you?

A second term.

Gubbmint Cheese's picture

"A light dusting of downs syndrome"

Adam Carolla

baby_BLYTHE's picture

Holy crap, we got Adam Carolla fan in the house? Reps!

"The world is your oyster…because that’s all the world is."- Adam Carolla

Vic Vinegar's picture

In Fifty Years We'll All Be Chicks...recommended reading for even the most scholarly amongst us.

vast-dom's picture


SheepDog-One's picture

We've already had the mild recession, now time to face reality and see we're in the greatest depression!

SheepDog-One's picture

Remove the ZIRP and QE flooding into bank vaults and see what the 'mild recession' is in reality, total full blown depression.

Dr. Richard Head's picture

You can remove ZIRP and QE now because SNAP is stimulus, at least according to Obama Ag Secretary -


pods's picture

If you remove SNAP, Rome burns tomorrow.  


Dr. Richard Head's picture

It was tried in Atlanta, GA due to a "glitch" in the system and boy did the natives get restless.  I would provide the video, but it has been removed from YouTube due to copyright infringement.  I tried to locate from the FOX affiliate in Atlanta, but it has been removed from there as well.

Joke 'em if they can't take a fuck - Robin Williams.

karzai_luver's picture

fireball bitchezzzzzzzzzzzzzzzz!



Mercury's picture

But wait!....what’s that rolling across the heartland of America?......its…..the economic grim reaper mobile?!...


Citizens and comrades…surrender your liberty and property….resistance is useless!


dwdollar's picture

Haha...  It's like Darth Vader's bus.  He's coming to your town to find some rebel scum.

Mercury's picture

There's one in the back of the bus.  When they drive close to cities Barry likes to play Night Rider.

JW n FL's picture
by andybev01
on Tue, 08/16/2011 - 16:05


If I had $1.1 mil to drop on a ride it would be this:


that car is NOT! $1.1 million.. that is a super sport.. it is not a regular Bugatti.

the carbon fiber hood is the give away.

Cdad's picture

I heard 1 in 3 chance of recession.  I heard it about 20 times, and I read it about twenty more times.  However, these sources were all criminal banker types, syndicate analysts, and rating agency clown types.

So agreed...100% is a lock.  And if the debt bubble bursts in Europe, severe depression.

The fact that equities continue to ignore credit is shades of 2008....and so unbelievably stupid as to cause me a high level of concern for floor traders.  Since my tv recently became a radio, can anyone confirm whether or not Steve Grasso at the NYSE is wearing a hockey helmet and mouth gaurd?  Thanks.

SheepDog-One's picture

All is a calm line on the floor, probably end up all green as robots relelntlessly bidding up everything in sight like winos in an alley with a magically refilling bottle of Night Train. Its a hobo miracle market!

Cdad's picture

Poor Steve...he has been trying to rope folks into AK Steel for weeks.  He owns it.  He really should be wearing one of those hockey helmets that I donated to the NYSE last year for all the "special" guys on the trading floor...standing in the center of the room clapping for themselves.

Did you see how sickly those last two hours were, Dog?  I mean, puking up spaghetti and Jack Daniels while passed out on your back on the couch sickly, man, with a plastic bag over your head even.  That was one of the worst attempts at a fake bounce back that I have ever seen.

Fuck me, Dog.


Long-John-Silver's picture

We recovered from the 2008 recession?

Sudden Debt's picture

that was just a soft patch. It was the media who blew it out of proportion...


Crack-up Boom's picture

You mean a "soft patch" like the la brea tar pits?

knukles's picture


don't forget transitory

Joe Davola's picture

Is it like a mild concussion - one someone else has?

pods's picture

Of course, with the way that they refuse to flush out all the bad debt hidden away, this is going to be more like a mild case of herpes.


You Lie's picture

The global financial system has become whack-a-mole.     And the game is speeding up.

Johnny Lawrence's picture

Speaking of recession, Obama reversed it until he hit "bad luck":

At a town hall meeting on his campaign-style tour of the Midwest, President Obama claimed that his economic program "reversed the recession" until recovery was frustrated by events overseas.  And then, Obama said, with the economy in an increasingly precarious position, the recovery suffered another blow when Republicans pressed the White House for federal spending cuts in exchange for an increase in the national debt limit, resulting in a deal Obama called a "debacle."

"We had reversed the recession, avoided a depression, gotten the economy moving again," Obama told a crowd in Decorah, Iowa.  "But over the last six months we've had a run of bad luck."  Obama listed three events overseas -- the Arab Spring uprisings, the tsunami in Japan, and the European debt crises -- which set the economy back.


Also, high yield correlates very highly to the equity market.  When the equity market sells off, so does high yield.

nantucket's picture

here's a little tidbit about "bad luck" appropriate for the Obama bad luck comment


"Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.  This is known as “bad luck.”

SheepDog-One's picture

Well as long as 'poverty' is defined as not having the latest version of the IPad, yea. 

Whenever the tiny percentage is kept from 'creating'....creating what? Debt slavery? I'd far rather live on a ranch farm and have some peace and quiet rather than the pointless rat race to beat the Jones' in number of useless trinkets purchased on credit. 

All baubles and bullshit.

caerus's picture

i'm with you...grew up on a's a good life...

SheepDog-One's picture

BTW I have to ask Nantucket...just who are these 'tiny percentage of 'creators' who whenever theyre 'driven out of a society' always results in that society becoming poverty stricken? 

Those who have always created central banks and fiat currency and fractional lending? 

Who are they? These 'creators'?

nantucket's picture

so how many people do you personally know that have created/invesnted something that has changed the world?  Not many, huh?  It' because there are so few.  What percentage of people do you estimate have made transformative inventions that greatly contributied to mankind?

Once again, some numb nuts has picked his pet peeve issue (fiat currency, fractional a-hole yada yada) and ASS-sumed the quote was referring to that.

C'mon boys and girls, think before you verbal diarrhea; this is the UFC of forums, don't come light cause you'll get housed.

SheepDog-One's picture

So if these 'creators' are so great, why do they then get driven out of society? And where did they go? Simply dont know who or what youre talking about, no need to get all butthurt about it. 

Cdad's picture

don't come light cause you'll get housed.

Great...'cause I'm homeless just now.  Where's the link to my voucher?