An Insane Bond Market In 4 Charts: "Italian Junk Bonds Yield Less Than US Treasurys"

In our "WTF Chart of the day" from last Friday, we showed something stunning: European junk bonds yields were the same, and in some cases lower, than comparable-maturity 10Y US Treasurys.

In other words, the distortion unleashed by Mario Draghi's CSPP, or corporate bond buying program unveiled last March, has made European junk bonds "safer" than US government-issued paper.

These observations prompted BofA's Barnaby Martin to ask overnight "Is Euro High-Yield the new US Treasury market?."

Picking up where we left off, Martin writes that "inflow surges mean bubbles…and bubbles mean tight spreads. Perhaps no better example of this is the rapid price appreciation in Euro high-yield bond prices lately. In less than a month, Euro HY yields have declined (another) 55bp, reaching an all-time low of just 2.3%."

Next, Martin redoes the chart up top, and repeats that "European HY yields have almost declined to the yield on BofAML’s US Treasury index" adding that while "there are indeed duration differences between the two markets, it doesn’t detract from the eye-watering levels that European high-yield has now reached."

The results become even more eyewatering if one drills down on the "higher rated" European junk bonds, those in the BB bucket: here the relative value is "even more eye-watering" as over 60% of BBs rated HY bonds yield less than similar-maturity USTs and, "ironically, €23bn of Italian BBs now yield less than Treasuries."

As Martin adds here, "note that this is not just because some BBs are CSPP-eligible. There are plenty of non CSPP-eligible Euro-denominated BBs that yield less than US Treasuries."

The next chart shows that the plunge in bonds yielding more than matched-maturity Treasurys started roughly around the time Draghi unleashed the CSPP, confirming yet again (in addition to the chart on top), that it was the ECB that made European junk bonds "safer" than US government paper.

Finally, in an insult to fundamental analysis and credit strategists everywhere, the chart below shows what Martin calls "irony", but is instead a beautiful demonstration to what extent the ECB broke the European bond market: around €23bn of Italian Euro BB-rated junk bonds yield less than equivalent-maturity US Treasuries.


Haus-Targaryen GUS100CORRINA Thu, 08/10/2017 - 10:13 Permalink

Its funny what this communicates ... basically those who still own Euro HY debt think the euro is going to strengthen against the USD via the tightening of monetary policy, the problem is it is that that exact monetary policy that has created so much demand for said HY debt.  This trade goes south for all that hold it as literally nothing can be done to keep it going. IF the ECB becomes more accommodative the EUR will weaken against the USD (as the Fed is tightening) and the value proposition to purchase this shit goes away, only buyer would be the ECB.  If the ECB becomes more hawkish and takes the "punch bowl" away, demand for these things dries up and people start taking money off the table.Damned if you do and damned if you don't.  They best course of action right now is hoping to God that status quo continues forever and ever and ever, amen. The ECB really screwed itself.  

In reply to by GUS100CORRINA

Haus-Targaryen Looney Thu, 08/10/2017 - 10:03 Permalink

Well re-denomination risk be damned. We've crossed the Rubicon recently from "high-risk investment" into "stupidity". If I held Euro HY debt right now I'd be shoveling it into Sonnemannstraße 20's Tresor as quickly as I could and would be purshasing 10 yr USTs with both hands now that there is effectively no re-denomination risk premium within the EMZ. When this HY bubble blows, the ECB is going to either have to print the cash and hand it out to the sovereigns to recap itself, or its going to cease to exist. Those in power will not willingly give it up, DAX 50k if these bastards get their way.   

In reply to by Looney

SoDamnMad Thu, 08/10/2017 - 09:58 Permalink

Well then just load up on them Italian bonds. What can go wrong? Migrants, change of government,   Italexit, bank failures, too many NPL, northern half succeeds?

Paul Morphy Thu, 08/10/2017 - 10:02 Permalink

The space for bond yields to fluctuate becomes smaller and smaller.Whent the bond market cracks, and it has to crack at some point, then all Hell breaks lose.

surf@jm Thu, 08/10/2017 - 11:07 Permalink

Central bank manipulated italian junk bonds, are not safer than U.S. treasuries, at any interest rate.....And since they all pay interest that is less than the rate of inflation, they are really all junk........ 

InnVestuhrr Thu, 08/10/2017 - 11:24 Permalink

When the BIG sell-off comes as a result of investors desperately trying to flee the absurdly inflated risk assets markets,ThenUSA treasuries will rocket up to previously unimaginable prices as most of the money leaving risk assets seeks safety to preserve capital.

Rebelrebel7 (not verified) Thu, 08/10/2017 - 12:23 Permalink

NEWS FLASH to the MIC!No need for nuclear war! We will all die  laughing and waiting for sanity!