The following is from the 11/15 Premarket Comments. For years I have been warning that the bond market is the biggest top ever, and have given very precise, detailed AND accurate trade recommendations regarding how to trade the huge top and multi-decade bear market. Some of that discussed here. More discussions in the 11/15 Premarket:
Plenty of detailed discussion about the stock market yesterday and also with this new post here. In there is discussed the levels below which I am still….as well as take intraday shots…..Above there looking for…..
And from a couple days ago – “Again with my previous comments last month, there will be more….lows, no matter how it plays out. The volatility is the only thing which allows for the setups in the INDIVIDUAL stocks. Some bkos working, some not, last month none were working. Also, buy and hold is dead folks. Going forward in all markets. If you have not taken advantage of the opportunity, worked very hard since I started this website, to really develop your trading skills with all of my lessons, work, posts, teachings done here, I do not know how you will deal with what we have coming. It is the higher bond yields which is the “culprit” And I have discussed that a 100x at this point. And the corporate bonds are also in big trouble, along with munis, floating rate, and all bond derivatives. Junk bonds are very worrisome – very – LQD, JNK,”
And on Wednesday more new lows in JNK plus LQD. Below are 2 articles about bonds. One is a very good one explaining why junk bonds are a mess. The other one is about how people are going to continue to buy bonds into a downtrend for years and years. And a big problem with LQD, is that some of those bonds are rated as IG, barely, a BBB-, so included in LQD, but a minor slowing in the economy and they will be downgraded to junk. Also, too many of those bonds are rated too high to begin with. I’m going to restate this about the “best economy ever”. I voted for the President, but his claims are absurd. I am always for across the board rate reductions, his plan was pretty good, not great. But even a beautifully designed tax cut plan, the real true dynamic profound long-lasting entrepreneurial effects on the economy – they are still not until longer-term, years down the road. You get the short-term boost (amphetamines), but the intermediate-term give back (hang over) – (Does speed even give you a hangover? Bad example? Wouldn’t know thankfully.). As to my belief what is the biggest part of the “best economy” – the huge increase in, not the deficit $779B, but actually the real culprit (or boost for this discussion) is the increase in the DEBT last fiscal year – $1.25T, yes “T”. And as discussed with you recently, from what I’ve cobbled together, the increase this fiscal year could easily be $1.5T, with an actual maturity rollover of $2T, for the Federal alone. Wow.
And the corporates, are no better, at this point, later on maybe with IGs not JNK tho, but right now, look at the TLT vs the IG rated LQD vs JNK. What is showing the….? Also, very concerning as far as higher rates coming, the high in the stock market was 9/20, since then the “#1 highest flight to quality” instrument, US Treasuries – since 9/20 the TLT is DOWN 3 points. I said this YEARS AGO, US Treasuries are going to completely lose their flight to quality status, but I added forcefully, that it will occur VERY slowly. And for all of the totally inept Wall Street and analyst community, they will figure it out WAY WAY too late. And the stock market will replace bonds VERY slowly over time, with a much much lesser extent gold. Also, as I discussed over a year ago, once we get to….on the 2 year, the Fed is going to be taking a long pause. We got to 2.99% on the 2 year, it is has backed off to 2.84%. One…. Above….and 2 years start actually looking attractive for many many institutions and individuals. A pause will have profound effects all over the place.
AUG 17 I discussed why I was going to 100% cash in my account for bigger position-type trades, and discussed why only will be trading indexes and small stocks. Still have not done any bigger stocks, there are more setups, but just not nearly enough, some working some not. And you have ….which I’ve liked for a long time and have discussed several times, but compare the beautiful tight pre-bko areas to this one now which is erratic and wide. So to me it is still a market to…. which I always do anyway, but that strategy in a strong market makes me look like, and am a, fool. Why? Because with strong underlying indexes you have very big….potential. And I am holding 1/2 DRYS and 1/4 CRNT with tight stops. Remember back in Feb with those lows, I did not put out my list until 4/2, the very low day of the retest as it turned out green arrow, two months after the 2/9 low. That long before I started doing actual position trading in earnest.
From Bloomberg:
The worst year for corporate debt in a decade is just the start of the slump.
That’s according to Jason Shoup, head of global credit strategy at Legal & General Investment Management America, who said that rising rates, fading stimulus, weaker earnings and potentially more downgrades all add up to a tough year ahead for U.S. investment-grade credit.
High-grade bonds may be able to claw back some of the steep losses seen in October if issuance slows, Asian investors stop selling and stock markets stabilize, Shoup said in a Nov. 9 phone interview. Still, next year looks dicey.
“I wouldn’t be surprised if the second half of 2019 really poses some significant challenges and could result in wider spreads,” Shoup said. “Without that central bank support and transitioning off the fiscal stimulus, our long-term outlook for investment grade is definitely on the more bearish side over the last two to three years.”
Below are more highlights from the interview:
Slowing Growth
- As the Federal Reserve reduces its balance sheet and higher rates weigh, the economic boost from U.S. tax cuts should fade, Shoup said.
- “The contribution of fiscal stimulus to growth has to slow. It’s not like we’re going to do another tax cut on the same order of magnitude that we once got,” he said.
- That will slow growth — possibly by at least 1 percentage point after the second quarter — which along with rising input costs fueled by trade wars, should have a negative impact on corporate profits.
Downgrade Risk
- That could mean billions of dollars in BBB rated bonds will be cut to junk.
- “The concern is that companies can get behind on that deleveraging path and if profits really do slow meaningfully over the next 12 to 18 months, you would think that more and more of those companies are going to get behind and be subject to potential downgrade risk or at least repricing risk,” Shoup said.
- As General Electric Co. trades more like high yield, Anheuser-Busch is also a concern, Shoup said.
- “If Anheuser-Busch loses its Moody’s rating — which we think is likely — do we get a repeat of GE, in terms of Anheuser-Busch? At the moment I would say Asia has been selling GE risk but has been willing to buy Anheuser-Busch risk, so it seems less likely,” Shoup said.
Liquidity Wildcard
- Shoup said he expects less liquidity in the market will cause more volatility.
- Secondary liquidity is worse than it was during the last big credit sell-off at the beginning of 2016. The shape of the yield curve has made dealers reluctant to hold bonds because of the negative carry, just as foreigners may be becoming more reluctant to buy, according to Shoup.
- “Asia and the foreign bid has been such an important component to demand in the credit markets in the last few years. Any sniff that they’re going to turn into a seller of a certain name has this potential to trade an exaggerated move wider,” he said.
Diamonds in the Rough
- Shoup said he sees potential opportunities in energy pipeline and financial sector bonds. Temporary increases in leverage by Master Limited Partnerships, so that holding companies can buy out operating units, make those bonds attractive, he said.
- “The Williams, the Energy Transfer Partners — those are companies that trade on the riskier side in terms of spread and we think that that will continue to outperform,” Shoup said, adding that his firm has a strong conviction about the trade.
- Legal & General also likes banks, particularly after they failed to issue new debt following earnings. Shoup said he is “cautious” on the pharmaceutical sector, and is awaiting more mergers and acquisitions.
- Underscoring its defensive positioning, Legal & General has a higher than average allocation to cash and Treasuries, he said.
This article was originally published on ETFTrends.com.
As the capital markets were in the thick of the extended bull run that peaked in the summer prior to the October sell-offs, high-yield assets saw an influx of investor capital, beating out their higher-rated rivals in investment-grade corporate bonds. After investors got washed through the October volatility cycle, that may have tamped down their risk-on sentiment and this is where Goldman Sachs sees a potential buying opportunity after investment-grade debt fell out of favor during the bull run.
As corporate earnings for much of 2018 were largely positive, it made servicing debt, investment-grade in particular, easy. With investors hungry for risk, the yields in investment-grade corporate bonds weren’t enough to satiate that appetite.
“In the investment-grade space, particularly the first half of the year, a lot of LBO (leveraged buyout) and M&A (mergers and acquisitions) activity, a little bit of increase in leverage at a time when debt services are extremely easy to make and earnings are really good,” said Michael Swell, managing director at Goldman Sachs Asset Management. “And so, it’s not a significant risk factor. The investment-grade market is actually the one that’s seen weakness over the course of the entire year and we think that’s an opportunity.”
After the downpour of volatility in October, investors may now be ready to seek refuge under the umbrella of investment-grade corporate bonds again. As a result, high yield has underperformed lately as investors flocked to the safer confines of investment-grade debt issues.
“While in high yield there’s a little bit of an opportunity because they’ve underperformed recently, you’ve had a supply shock in the first half of the year in investment grade and you’ve had the opposite happen in the second half of the year where supply has declined,” added Swell.
While it’s notable that both high-yield and investment grade took a hit during October, investment-grade was able to nullify the volatility better as evidenced in the chart below:
Investment-Grade Options
Investment-grade corporate bond-focused fixed-income ETF options include the iShares Intermediate Credit Bond ETF (CIU), iShares iBoxx $ Invmt Grade Corp Bd ETF (LQD) and Vanguard Interm-Term Corp Bd ETF (VCIT) .
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
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