The Junk Bond Market Is Collapsing

It’s not just distressed debt or the energy sector.  I was chatting with a friend/colleague in NYC who is connected with the high yield market.  To begin with, the economic devastation to Texas from the collapsing price of oil is just beginning.  Word to him from a big Texas bank is that the massive asset write-downs – i.e. energy and real estate loans – are just starting.  Up until now the banks and financial firms have been able to hold off marking to market in hopes of a recovery in the price of oil.  But distressed offerings in oil, gas and real estate assets are starting to hit the market and it’s going to force the issue. This is going to get ugly.

This is economic fall-out that will spread to the entire country.

Next we turned to the high yield market and he remarked that the junk market is collapsing.  And it’s not just oil bonds – it’s gas, technology, healthcare, industrial, retail – everything. The few recent deals that got done soaked up all the cash available and now big outflows are starting again.  There’s no liquidity and bids that show up within a reasonable context of the quoted bid/ask market get tattoo’d.  It’s impossible to move any kind of stuff – i.e. big investors, mutual funds, pension funds are stuck.

Here’s two graphs that illustrate just how far off the rails the stock market has gone:

UntitledThis graph from The King Report illustrates the current differential between junk bonds and the SPX vs. the differential in August. Recall that in August the S&P 500 plunged 11.2% in six trading sessions

The second graph compares the returns to the HYG I-shares high yield ETF and the S&P 500. As you can see the, divergence between the S&P 500 and the high yield bond market has reached an absurd level. The high yield market, in the absence of extreme intervention, typically will lead the stock marketUntitled1 directionally. This is especially true on the downside because high yield investors typically are “privy” to bank credit information – trust me, this is true, as our high yield desk was next to the bank debt trading desk and we were very friendly with each other – and can see when corporate numbers are deteriorating well in advance of equity analysts and investors.  As you can see from this graph the divergence between high yield debt and the S&P 500 has never been greater.

We can draw two conclusions from the information conveyed in the two graphs above:  1) the Fed is terrified of letting the stock market move lower and, for now at least, has a solid iron floor beneath the stock market;  2)  the credit condition of corporate America has been deteriorating since early 2013, punctuated by 3 quarters in a row of declining earnings for the S&P 500.  Revenues have been flat to down on average for a couple years.


This is not going to end well for anyone.  I would suggest that this is one of the specific reasons that the U.S. Government is ramping up its military aggression, rampant domestic fear-mongering and extreme propaganda.  We can’t even enjoy a college or NFL football game anymore without the shameless promotion of the military constantly thrown in our face.

History tells us – and it is very clear on this matter – when all else fails, collapsing empires start a war.  This war started slowly burning when Bush II attacked Iraq and now it’s escalating into a global conflict.  This will not end well…Happy Thanksgiving.

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.  – HL Menken

11 thoughts on “The Junk Bond Market Is Collapsing

  1. That´s totally correct that the FED has a “iron floor” under the market and god only knows how this floor should be removed.
    I have seen the same thing a couple of times recently.
    The market starts the day of going down but after a while like with a wip of a magic stick everythink starts to go up and the day ends in the green.
    I wonder what in the hell should happen to change this?

  2. Is it fair to wonder if the auditors will force the issue, as they should? They were either asleep, incompetent, or complicit at Valeant, so given the knock-on impact that energy-related markets will have on so many things, I’ve got to wonder if they’ve been told to go easy on the forced write-downs.

    1. I think TPTB will strongarm whoever they want in order to game the system, including auditors. People on the inside know what’s going on and they play their part in order to keep the ponzi going. They know their marching orders and they know that in their own self interest they won’t take drastic action. Nobody in a position of financial power will stand against the Fed and its minions. It’s all a shadow play, kabuki theater at its finest. The “Iron Floor” will gave way when TPTB have all their ducks in a row and not until that moment. IMO, war is definitely part of the timing for this. I think we should proceed knowing this is the only outcome, for it is written in history repeatedly. Ignore it at your peril.

  3. Thanks Dave knew the Junk Bond yields were moving up but this is salient data especially as we all can see the iron floor below the stocks and the crushing weight of massive shorting in the metals….FYI see we are bumping 250K from overnight until the Crimex close… many days over 200K contracts in the last couple of weeks needed to cap the market.

    Was listening to NPR a couple weeks back and they did a story on how much the DoD was paying the NFL for their nauseating displays at NFL games. God Bless America anyone? The brainwash is all encompassing. As Bill Holter said most of the country wakes up every morning hoping to be fooled about the reality for another day…..Baaa Baaa

  4. This whole charade is beyond retarded!

    The USA is being led by it’s nose, controlled by a select group of elites who happen to be the richest. If pigs could vote, they would still vote for the guy who brings the food. Even though that guy really likes to eat bacon!

    Hope is indeed a virtue but must be based in reality.

    “Violence is the last refuge of the incompetent”.
    – Issac Asimov

      1. One of Issac Asimov’s fictional characters – ‘Salvor Hardin’ uses this phrase in the novel “Foundation” about the struggle with an evil empire.

  5. Junk bonds collapsing? The cheap credit cycle has now ended. Junk is dead.

    The least risky BB rated bonds average now at 5.85%
    The riskiest CCC or below average over 15% from a low of 8% just last year!

    The majority of corporate bond debt has been used for M&A (mergers and acquisitions) which has set a new global record at $4.2 trillion, with the US portion at 55% or over $2 trillion. Some distressed issues are now selling for pennies on the dollar!

    The current credit crunch has inherent similarities to what occurred in 1999 and 2008, just before the markets crashed. Next stop???

    1. The High Yield differential is not for close timing, but it is getting pretty far along! Meanwhile we have racked up 6 Distribution Days on both S&P and NASDAQ indices during the past month and that is becoming immediately critical.

      1. HYG differential does show the increasingly higher cost of credit. As to timing? The breaking point is anyone’s guess. You won’t find it in any ‘StarCharts’ Arch!

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