Junk and High Yield Selloff, Equities to Follow?
On Friday, oil completed an 11% weekly decline, its largest since March. Junk Bonds posted their largest decline since 2011 and High Yield Bond markets hit their highest volume in the last two years.
FINRA- BLP Active High Yield Bond Index Volume = $5.8B, its 4th highest volume day in 2 years. Add in High Yield ETF’s (HYG, 53M shares traded, doubling a record set on Tuesday) and (JNK), which combined for a record $5.5B in volume. The prior high for these ETF volumes was Tuesday with $3.2B, prior record was $2.2B.
HYG generally trades at a premium to the value of its underlying holdings. On Friday HYG was trading at a discount to the value of the fund’s underlying holdings, an unusual event that points to market stress, Investors were hesitant to buy the ETF, fearing they won’t reliably be able to sell the bonds without accepting large discounts. HYG has 53% BB-rated debt, with just 8% in bonds rated below CCC or lower and only 2% in unrated bonds.
More than $11.3B of risk changed hands in TRACE bonds and ETF’s on Friday. The CDX HY Index had over $10B volume on Friday, more than double its typical $4B.
From the FT... Mutual funds have been piling into corporate bond markets in recent years, even as the ability to trade these debts has atrophied as regulation and risk-aversion has spurred investment banks to curtail their market-making activities.
That has raised fears over a toxic “liquidity mismatch” in corporate bond markets, a phenomenon that people from Jamie Dimon to Stephen Schwarzman have said could exacerbate or even cause a crisis.
The crux is that investors can exit from mutual funds rapidly, which could create a so-called “flighty capital” stampede. However, the funds hold increasingly illiquid securities that are harder to sell.
On Friday, Carl Icahn, the activist investor, said in a tweet: “Unfortunately I believe the meltdown in High Yield is just beginning.” Many investors rushed to buy default insurance contracts on junk debt in particular, pushing the price of protection to near a three-year high.
The average yield of the most lowly rated US corporate bonds has rocketed from 10 per cent earlier this year to over 17 per cent this week, and the woes have begun to spread from the energy sector that was the epicentre earlier this year.
From Sputnik: Freeport-McMoRan Inc., one of the world's biggest copper producers, suffered a massive bonds plunge, which, coupled with copper prices at their multi-year lowest, puts the company on the edge of exhausting its financial resources. Freeport's $2B worth of bonds expiring in 2022 dropped 0.025 cents to 0.58 cents per dollar, according to data by the Financial Industry Regulatory Authority. Freeport bonds' yield rocketed up to 13.9%. Another miner, Anglo American Capital Plc has found itself in a similar situation with its $650M worth of bonds.
Sources: Peter Tchicr at Forbes; WSJ
FINRA- BLP Active High Yield Bond Index Volume = $5.8B, its 4th highest volume day in 2 years. Add in High Yield ETF’s (HYG, 53M shares traded, doubling a record set on Tuesday) and (JNK), which combined for a record $5.5B in volume. The prior high for these ETF volumes was Tuesday with $3.2B, prior record was $2.2B.
HYG generally trades at a premium to the value of its underlying holdings. On Friday HYG was trading at a discount to the value of the fund’s underlying holdings, an unusual event that points to market stress, Investors were hesitant to buy the ETF, fearing they won’t reliably be able to sell the bonds without accepting large discounts. HYG has 53% BB-rated debt, with just 8% in bonds rated below CCC or lower and only 2% in unrated bonds.
More than $11.3B of risk changed hands in TRACE bonds and ETF’s on Friday. The CDX HY Index had over $10B volume on Friday, more than double its typical $4B.
From the FT... Mutual funds have been piling into corporate bond markets in recent years, even as the ability to trade these debts has atrophied as regulation and risk-aversion has spurred investment banks to curtail their market-making activities.
That has raised fears over a toxic “liquidity mismatch” in corporate bond markets, a phenomenon that people from Jamie Dimon to Stephen Schwarzman have said could exacerbate or even cause a crisis.
The crux is that investors can exit from mutual funds rapidly, which could create a so-called “flighty capital” stampede. However, the funds hold increasingly illiquid securities that are harder to sell.
On Friday, Carl Icahn, the activist investor, said in a tweet: “Unfortunately I believe the meltdown in High Yield is just beginning.” Many investors rushed to buy default insurance contracts on junk debt in particular, pushing the price of protection to near a three-year high.
The average yield of the most lowly rated US corporate bonds has rocketed from 10 per cent earlier this year to over 17 per cent this week, and the woes have begun to spread from the energy sector that was the epicentre earlier this year.
From Sputnik: Freeport-McMoRan Inc., one of the world's biggest copper producers, suffered a massive bonds plunge, which, coupled with copper prices at their multi-year lowest, puts the company on the edge of exhausting its financial resources. Freeport's $2B worth of bonds expiring in 2022 dropped 0.025 cents to 0.58 cents per dollar, according to data by the Financial Industry Regulatory Authority. Freeport bonds' yield rocketed up to 13.9%. Another miner, Anglo American Capital Plc has found itself in a similar situation with its $650M worth of bonds.
The Nattering One muses... A stretch for yield with junk bonds selling at investment grade prices, meets reality, ugly indeed. With the Fed drinking its own econometric falsity punch, and a unfortunately necessary (to get off the zero bound) rate hike coming, the "robust" American economy is about to be exposed for what it is: the sub prime auto sector and low commodities, energy, oil and gasoline prices.
And so the cheap funding for record leveraged stock buybacks and MA is gone. With corporate profits and revenues plunging, the best is yet to come...Now would be a really good time to check that ETF or mutual fund prospectus and fine print. And do not forget, almost every time junk bonds decline substantially, equities follow shortly thereafter.
As our followers know, we have been Nattering ad nauseum and at length about this for quite some time. To get caught up, the seven part series: Contractions In Money Flows And Market Liquidity and two part series: The New Paradigm For ETF, Mutual Fund, Bond Fund And mREITs
Sources: Peter Tchicr at Forbes; WSJ
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