The Third Worst 100 Day Sell Off In Corporate Debt In 18 Years

By: Kent Engelke | Capitol Securities

Bloomberg reports that: “Corporate bonds sink fast in one of the worst tumbles since 2000,” stating the current 100-day sell-off is the third worst in 18 years. The Newswire further states that last week was perhaps the capitulation, citing an increase in economic activity that questions monetary policy assumptions.

The issue I have at hand about the above statement last week was that it was regarded as a data-nonevent, defined as there was a dearth of top tier statistics released. Can I offer another reason? A regulatory induced change in bond market mechanics that is causing a proverbial liquidity trap.

As noted several times, the bond market has increased in size by over 200% since 2008, but money center bond inventories are down over 90%. This dearth of liquidity was exacerbated by yet another regulatory change implemented last week, a change that only those in the industry are discussing or can remotely understand.

Citigroup also warned yesterday all should prepare for a possible “normalization” of risk premiums across the credit spectrum as “the era of monetary distortion unravels.” Citicorp further commented as the economy’s “upward march in concert with a term premium—the extra compensation to hold longer-maturity Treasuries over short-term securities—would justify the 10-year at 4% to 4.5%.”

Wow! I must write that Citi does not necessarily see bond yields at such levels, but was merely stating this is where yields could go based upon historical precedence.

Speaking of precedence, a central theme of these remarks is the dissolution of the multipolar interdependent economy. Bond giant PIMCO wrote global economies are becoming less reliant on central banks and less coordinated, setting the stage for higher volatility. PIMCO’s view was perhaps encapsulated by its comment, “Markets will have to stand a lot more on their own. Economies will have to fend for themselves as the world becomes less interconnected.”

Economic nationalism is gaining momentum, not losing it as many pundits wrote six months ago. As noted many times, this nascent change of money gravitating to Main Street from Wall Street is gaining momentum where yesterday’s rules and benchmarks may no longer be valid.

Speaking of validation, equity markets advanced yesterday as a potential trade war between the US and China was put on hold according to Treasury Secretary Mnuchin.

Last night the foreign markets were mixed. London was up 0.14%, Paris was down 0.04% and Frankfurt was up 0.11%. China was up 0.02%, Japan was down 0.18% and Hang Sang was up 0.60%.

The Dow should open nominally higher on an easing of trade tensions. Italian politics — or the election of yet another economic nationalist government — has taken a back seat at this juncture. The 10-year is off 4/32 to yield 3.08%.


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