On the day Mario Draghi announced that the ECB would launch a historic corporate bond monetization program, the first of its kind, we said that we expect bond yields to tumble imminently as the market frontruns the ECB's open-market purchases of corporate bonds and soaks up all available supply in the market. Not even we expected what would happen next though.
You know you have 'tinkered' too much in the machincations of what dealers now call a "dead market" when the world's largest sovereign bond market is inverted at the short-end and the long-end. Simply put, bond investors reluctance to sell their holdings - amid negative-er and negative-er yields - means The BoJ runs the risk of being unable to meet its buying operations this week.
When judged against the BoJ, the ECB probably still has a ways to go before hitting the limits of central banker insanity and so, we think it's entirely possible that Draghi moves into HY next. But the reasons to believe the ECB will take the plunge into non-IG corporate credit go beyond the “MOAR is always better” line. As BofAML’s Barnaby Martin explains, the EU corporate sector’s penchant for bond buybacks may ultimately force Draghi further down the ratings ladder lest the ECB should end up entangled in tender offers or else find itself without enough debt to monetize.
"To the extent this week’s ECB decision marks a shift towards private sector asset purchases, the ammunition the ECB has expands hugely. Assuming the ECB will be willing to navigate eventually into other private sector asset classes, the asset universe for QE purchases could expand to include uncovered bank bonds, bank loans and equities."
"... this leaves us thoroughly confused. We had thought that the ECB was turning away from further moves into negative territory because of the impact on bank profitability and, hence, on credit availability. Constancio appears to say this is not the key reason. It is disappointing to us to see the ECB without a clear and convincing explanation for why it perceives a bound on rates at -0.4% at this point."
Here, courtesy of Goldman, is a snapshot of the total size of Europe's Investment Grade market: this is where the ECB's trading desk will now be actively buying.
What are the “top trumps” that could send bond, credit and equity markets substantially higher or lower than currently expected? Here are the six "positioning, policy and profits" indicators that will determine the next leg in the market.
While India’s gross gold bullion import in 2015 reached the third highest amount ever at 947 tonnes and gross silver bullion import reached the highest amount ever at 8,504 tonnes, the Indian government is perpetually trying to obstruct the populace from protecting their wealth.
The state most reliant on federal spending is Mississippi where federal spending is equal to 32% of the state's GDP, and the current central banking regime perpetuates the current imbalance between net tax payer states and net tax receiver states by making it more difficult for poorer parts of the country to accumulate wealth and increase productivity.
The populist revolt fueling non-mainstream political movements in both Europe and the US flows from a single source: you can not fool all the people all the time. The central lie of our time is that governments can and should forcibly assume control of individuals’ lives, in the name of vague and always shifting greater goods. The Command and Control Futility Principle holds that governments and central banks can control one, but not all variables in a multi-variable system. The number of variables global governments and central banks have arrogated to their purported control has grown beyond measure. Breakdowns are visible everywhere, and as those failures exact their ever-increasing toll on the masses, the masses are pushing back.
As with Japan, Western economies that pursue a long-term policy of low or negative interest rates can expect decades of low growth unless these “unorthodox” monetary policies are rapidly abandoned. Recessions are not a problem of insufficient demand. They are a problem of supply being misaligned with demand.
With investment grade credit risk soaring, it's now or never for many firms to lever up at "relatively" low costs and two of the biggest buyback-ers are stepping up to the debt issuance window this week. Perhaps helping to explain the carnage in Treasuries at the end of last week (as rate-locks are set), Apple has unveiled a 10-part deal which could price today and IBM a 7 part deal. No size is indicated yet but Apple's previous two issuances were $8bn and $6.5bn.
"Worse than Lehman" is how one European bond market trader described the carnage this week as the brief respite that ECB monetization and debt-buyback rumors provided yesterday have morphed into utter destruction this morning. European (and US) banks are a sea of contagious red with Deutsche Bank the tip of the collapse spear. Credit risk on Deutsche has exploded this morning with Sub CDS trading up 85bps to a record high 540bps... eerily reminiscent of the pre-Lehman bankruptcy week in 2008.
Time to panic now?
Rumors of ECB monetization (which would be highly problematic in the new "bail-in" world) and old news of the emergency debt-buyback plan have sparked an epic ramp in Deutsche Bank's stock this morning (+11% - the most since Oct 2011). This extreme volatility is, however, eerily reminiscent of 2007/8 when headline hockey sparked pumps and dumps on a daily basis in Lehman stock... until it was all over.