Bond

There is no cure for low natural gas prices like low natural gas prices.

Over the last two decades the Fed’s interventionism has created artificial booms and real busts. Their dreadful mistakes are “fixed” by currency debasement, lower interest rates, and money printing – creating even worse mistakes. They have successfully gutted the American economy and left a hollowed out shell. The coming collapse will be three pronged as stocks, bonds, and real estate are all simultaneously overvalued. Junk bonds are the canary in a coalmine. High end real estate in NYC has topped out. New and existing homes sales growth has stalled out. Retailers desperately slash prices to maintain sales, while destroying their profits. Corporate profits are falling. The stock market is teetering on the edge.

High yield bond ETFs are down for the 8th day in the last 9, retracing the modest bounce from Friday afternoon, plunging to new multi-year lows. In fact, at current levels HYG is trading below the lows it hit in the immediate aftermath of the Lehman collapse (Sept 2008).

We won't be shocked if the Fed actually follows through and hikes rates this week. If they put off hiking every time the market has a little hissy fit, they’ll never get off zero. On the other hand, the stress in markets right now is real and growing. Raising interest rates doesn’t seem likely to improve those conditions. With a riot in the junk bond market, a complete lack of inflation and an already weakening economy, we won't be shocked if they pass either. For the first time in years, it appears people are actually worried about people being worried.

"The solution to uncertainty is cheaper valuations. If problems are priced in, investors can afford to look through near terms concerns and focus on the longer term. Worryingly, we have exactly the opposite situation today. Average stock valuations are close to historical highs – so we have lots of risk and little in the way of valuation cushion.... Time for a US rate rise then?"

"Our bond fund took a sizeable “hit” on Friday following the news of the refusal on the part of the Third Avenue fund to allow for immediate redemptions where those unable to sell their positions in Third Avenue sold what they could and where they could to gain access to liquidity."

Small doors, large crowds. Amid yet more liquidations (Brazilian Bank BTG flushing its European credit exposure and Lucidus US HY fund), the large high-yield bond ETFs are tumbling in pre-market as two years worth of under-water easy-money trend-followers head for the exits from the "highly liquid" ETFs.. . and crush what little liquidity there is in the underlying. When will The Fed step in and buy US HY debt to stymie "fire-sale" prices?

"One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash."

• Oil prices drop towards 11-year lows on worsening glut (Reuters)
• Third Avenue Seen by Top Investors as Fueling More Carnage (BBG)
• Lucidus Has Liquidated $900 Million Credit Funds, Plans to Shut (BBG)
• Investor nerves tested with yuan, oil, Fed in play (Reuters)
• Junk Bonds Stagger as Funds Flee (WSJ)
• Seattle lawmakers set to vote on allowing Uber, other drivers to unionize (Reuters)

Despite the decline in stock valuations, US equities have performed far better than credit, causing investors to ask us, “What does the credit market see that the equity market does not?” Credit markets are reacting to a real deterioration in corporate balance sheets that the equity market has yet to digest. High yield (HY) credit spreads have widened dramatically since June and are currently in territory typical of recessionary environments. In contrast, the S&P 500 is just 6% below its all time high of 2131 reached in May of this year. Here are five observations...

With just 72 hours to go until Yellen decides to soak up to $800 billion in liquidity, suddenly we have China and the Emerging Market fracturing, commodities plunging, and junk bonds everywhere desperate to avoid being the next to liquidate.

Here is a visualization of the change in junk bond prices since January 1, 2015. For those confused, the redder the worse.

Following weakness in the middle-east and as WTI prices slide back into the red (on the heels of record speculative shorts in crude oil), Asia-Pac stocks are opening to the downside (but only modestly). On the bright side, the ZARpocalypse has been delayed briefly as the Rand is rallying on the back of Zuma hiring a new finance minister. On the dark side, offshore Yuan continues to plummet, down 6 of the last 7 days (down 14 handles!) and the Yuan fixed weaker for the 6th day in a ro wto July 2011 lows. and signaling more turmoil ahead of The Fed's decision. AsiaPac credit markets are gapping notably wider, EM stocks down 9th day in a row to 2009 lows, and EM FX is plunging.

And just like that last week's junk bond debt fund liquidation and redemption suspension, which first struck at the mutual fund giant Third Avenue and promptly spread to a hedge fund launched by the former heads of distressed and high yield trading from, get this, Bear Stearns, and was supposed to be quietly buried, went front page and nuclear following a WSJ report that the CEO of Third Avenue, David M. Barse, who had been with the company for 23 years, has been fired.

It should be easy to at least get the direction of interest rate changes correct, most of the time.  Instead as we see in the chart here, professional money managers always get this wrong (and truth be told this pattern has been going on for many cycles).  The problem is just as bad when it comes to predicting stock price changes for the following year. While both risks in stock and bond markets are again smouldering in advance we focus our attention here on the knottier and more pertinent idea of the dispersion about interest rates expected for 2016.  In other words, what should this probability distribution of outcomes or errors best look like?