For the past two months, we have repeatedly warned that the recent spike in ultra short-term yields as manifested by both the blow out in 3M USD Libor and the Libor-OIS spread, has been an especially ominous move for the bond market as it confirms that funding conditions have become painfully tight for issuers of trillions in floating-rate debt.
This was confirmed one month ago by Morgan Stanley which said that "Soaring Libor Is The Story Of The Year, Not The Fed", although as Citi's Matt King subsequently explained , the two are intimately connected (and that the surge in L-OIS has nothing to do with T-Bill supply and little if any impact from the new BEAT tax). Readers can read more about our considerations in the following posts:
- Why US Tax Reform Will Put Even More Pressure On Dollar Funding Markets
- Libor-OIS Blowing Out On Rising Repatriation Concerns, Collapsing Front-End Funding
- Libor-OIS Contagion: As Spread Blows Out, It Starts To "Infect" Other Markets
- Libor-OIS Blows Out As Libor Rises Above 2% For The First Time In 10 Years
- Is A Dollar Funding Crisis Imminent: Libor-OIS Blows Out The Most Since 2012
- FRA-OIS Blows Out Above 50bps For The First Time Since 2012
- Bank Credit Risk Flashes Red As Libor-OIS Spike Spooks Global Funding Markets
- How Many Trillions In Debt Are Linked To Soaring LIBOR?
- Why Citi Is Suddenly Freaking Out About The Exploding LIBOR-OIS
- Matt King: This Is The Real Reason Behind The Blow Out In Libor-OIS
- Feud Breaks Out Between BofA And Credit Suisse Over Cause Of Libor-OIS Blow Out
And yet, while Libor has continued to rise and was up again at 2.36% most recently, rising 1% in just the past 6 months, the funding problems revealed by the surge in Libor mainly impact the (corporate) supply side, where as we showed yesterday, cash-rich corporations have not issued a single investment grade bond so far in 2018 as a result of Trump tax reform, making short-term liquidity even tighter in what is now an increasingly troubling instance of private sector "QT", one which merely adds to the tightening launched by the Fed's rolloff of its own balance sheet.
Meanwhile, on the demand side, the recent spike in yields has made funding conditions just as problematic. As Bloomberg notes this morning, for all the focus on the 10-year Treasury yield crossing 3%, the far scarier move has been the spike in, you guessed it, short-term rates which is flashing the true warning signal for companies, share prices and consumers, according to Peter Tchir at Academy Securities.
As Tchir points out, the surge in two-year yields to the highest since 2008, is "the scariest chart for investors" while one-year bill rates are, predictably, also the highest in almost a decade.
"The 10-year yield might attract all the attention but higher short-term yields are more problematic," Tchir wrote in a note Wednesday. “Consumers who want to purchase large items are faced with higher costs. Investors can allocate to less risky bonds and out of dividend stocks and still get some yield.”
Jefferies' economist Thomas Simons agrees with Tchir: "It’s absurd that everyone is falling all over themselves talking about the 10-year at 3 percent,” said “How about the one-year bill at 2.20?"
Both are correct: it is only a matter of time before deep pocketed institutional investors decide that a 1-Year yielding 2.25% is a good alternative to stocks, which currently are yielding a markedly lower1.97%...