This morning's illiquidty explosion in pre-open equity, commodity, and bond futures markets [5] suggest the so-called 'tape' is indeed broken; but just over a month ago, the 'taper' word broke the relationship between bonds and stocks. For the previous five months, both Treasuries and credit spreads had rallied in almost perfect tandem with stocks as the 'flow' from the Fed (and Japan) floated all clean-shirty US assets. And then, with the mention of one little word, Bernanke and his team sent the bond market scurrying (it wasn't growth concerns as we noted here as spreads rose [6]) but left stocks only bruised. Today, it appears, the world has taken a breath and flip-flopped once again - a better-than-expected payrolls print (which suggests we are closer to a Taper) is now bullish for stocks and bearish for bonds (but as we noted before [7] this cannot last since the cost of credit increasing bites into EPS estimates as the credit cycle turns). With the FOMC meeting in less than two weeks, it seems if you truly do not believe in the Taper you buy bonds (Treasuries or high-yield credit if you are brave) not stocks... if not, you know what to do...
As we have noted previously - we do not think the "Taper" chatter is anything to do with macro data (which has been ugly aside from today's slightly better than expected payrolls print) but is in fact entirely due to the Fed's concern at markets having gone too far too fast and needing to walk us back from the irrationally-exuberant ledge...
Both 'safe' and 'capital-structure-sensitive' bond markets have shifted since the "Taper" word...
Treasuries...
[8]
and Corporate Credit...
and credit's move may be both flow and fundamental-based...
Via Citi:
One of the most sacrosanct of fundamental relationships for credit investors has lost its divine right of late. Corporate net leverage has been steadily on the rise as spreads have been on the decline, to the point where a significant gap has opened up
[9]
For many, the leverage disconnect is particularly alarming even if most agree it’s been a predictable byproduct of quantitative easing. After all, when QE1 and QE2 concluded, credit and other risky assets underwent a significant correction. Might not history repeat for a third time, especially when faced with the prospect of fundamental deterioration in balance sheets? It’s certainly a possibility investors should bear in mind.