Record 30-Year Long Bond Gyrations
What’s Going On?
Given that a deflationary crash is underway with the Fed about to slash rates to zero, the yield on the long bond ought to be dropping.
In the initial phases of this stock market decline, that what happened. The last four days of rout undid a major portion of the yield plunge.
Why?
I posed that question to Lacy Hunt at Hoisington Investment Management, one of the largest bond firms in the world with over $4 billion assets under management.
Redemptions
The answer in one word answer is redemptions.
“Pension plans, nonprofit corporations, leveraged hedge funds and others are selling what they have a profit on, not what they need to,” said Lacy in a phone conversation.
“They need funds for operations and to make pension payouts.’
Since the start of the year, the yield on the 30-year bond has plunged from 2.3% to well under 1.0%. Even at 1.43%, Hoisington is having a banner year because the firm is long on duration. Hoisington’s average duration is over 20 years.
Despite the banner year, his firm too was met with redemptions.
“They are selling what they can.” It’s that simple.
Stock Market Actions
The stock market is down over 20% in a record 16 days.
Today’s 10% Plunge is the Worst Since 1987
Fund managers do not want to sell junk bonds or stocks in this decline, so they are selling what they are ahead on and what is liquid.
Action in Gold Similar to Long Bond
By keeping illiquid junk bonds and stocks pension plans are keeping losers and dumping winners.
Leverage on the Rise
Please recall a $1 Trillion Powder Keg Threatens the Corporate Bond Market
Levered Up
- After a decade-long buying spree, many companies have pushed their leverage to levels that are typical of junk-rated borrowers in their sectors.
- Bloomberg News delved into 50 of the biggest corporate acquisitions over the last five years, and found more than half of the acquiring companies pushed their leverage to levels typical of junk-rated peers. But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody’s Investors Service and S&P Global Ratings.
- This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market, Bloomberg Barclays index data show.
The above article and chart is from October 11, 2018. The leverage (and bubble) is bigger today.
Junk Bond Bubble in Pictures: Deflation Up Next
Flashback July 17, 2019: Junk Bond Bubble in Pictures: Deflation Up Next
Over half of the US bond market is a step or two from junk. Downgrades will take it there.
Guess what happens then?
Pension plans will be forced to sell assets into a declining market. A day of reckoning awaits.
Pleaser check out the above link. It is loaded with good charts that I now need to revisit.
No V-Shaped Recovery
One final point I failed to make.
Lacy believes a “Recession is coming and there will be a rebound but a very weak one, not a V-shaped recovery.”
Mike “Mish” Shedlock
My mortgage broker call yesterday to schedule my refi closing. He said that he got 9 rate change notifications this past Monday. 8 of them were higher rates. Mine was locked at 2.9% a couple of weeks ago.
Hunt is one of the smartest fixed-income guys out there and his prognostications are usually very prescient. If he says we’re going to have a recession, and a U-shaped one – watch the @#%* out!
Mish any thoughts on how the bond situation will affect stocks? I am not a bond or individual stock trader. I ignored all of the usual advice against trying to time the market and sold my index and value funds because I felt like the market was asleep at record highs even as China was falling apart, so I sold everything and went to money market. I’m wondering when these downgrades might occur. We seem to be about 2 weeks behind Italy on the virus trajectory and I feel like a lot of people here are still in denial. Still delusions about V-shaped recovery and being back to normal in a month or two. That being said, the virus seems to be spreading out of control so we might be back to normal (health-wise) in 6 mos? Who knows. I assume Fed will keep pumping QE like no tomorrow. Grocery store was a madhouse today here in suburban Nor-Cal with lines to the back of the store. Luckily folks were in a good mood and no fights over TP.
Disagree with this thought “We are going to see failed Treasury auctions galore in coming weeks/months.”
Curious to get some elaboration from you on this Mish. Don’t you think we could see some failed auctions? If not, why?
A couple of things are holding me back from going aggressively into treasury ETFs:
What happens if markets (equity, derivatives, bond desks, etc.) have to be shut down indefinitely like the NBA, NHL? Being forced to hold over that period sounds agonizing to me.
What happens if we see a couple of treasury auctions go poorly? Obviously treasuries are supposed to be a safe haven asset, but there’s no guarantee that every auction will go smoothly. And if a couple don’t, I think the bond markets will freak out.
Bonus concern: Bond ETF price to NAV spreads blowing out due to mismatch in liquidity between ETF and underlying + panic mode in the markets.
Hunt is a rare genius. Just on another level. Great article Mish. Quick question: I assume the long recovery is in regards to the actual economy or it in reference to equities? Or both? After all equities have been dislocated from underlying fundamentals since effectively the GFC (thank you very much Fed)
Hunt does not comment on equities.
Thus, the economy.
I take it he is looking at a Japan scenario but that is speculation. I did not ask that.
We have huge monstrous bubble. It looked for a pin. COVID-19 is quite a pin. I wonder whether we would see the market implode in 2020 w/o COVID-19.
“But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody’s Investors Service and S&P Global Ratings.”
So selling “investment grade” bond ratings again are they? I need to get in on that business, you need no employees, no factories, damn, you can sell a bond rating with nothing more than a laptop and careful proof reading. Heck, just let the companies make shit up and sell them your stamp of approval. I assure you it will be as good as any of the major ratings houses. No matter what Moody’s or S&P charges I will undercut them. Sale: $600 per bond rating.
unfortunately, you have to be a member of an exclusive club
Fed is between a rock and a hard place,to drive equities higher,the $200 billion daily injection that worked for over a decade isn’t working,which means they’ll have to triple (quadruple)to well over a $trillion a day into stocks just to keep “markets”flat!! So do you print $300 trillion a year and buy stocks and detonate the dollar or let the “market ” crash? Obviously they chose the dollar.
Expect annual budget deficits to explode to 2+ trillion soon
And which buyer will magically appear for this low-quality, low-yield paper?
CDS on US Treasuries are already starting to blow out.
I believe we are seeing the end of the 39-year Treasury Bond bull market right here and right now.
The fed ?
( And thanks Mish for the explanation.)
“I believe we are seeing the end of the 39-year Treasury Bond bull market right here and right now.”
…
No.
Deflation on tap.
Yes, deflation coming.
But the big surprise will be HIGHER interest rates due to credit risk.
Something like this was my guess on why bonds and gold are dropping too. Happened in 08 as well but wasn’t as fast it seems.
I must admit I’m not too worried about the Gold price at the moment. I own some bullion so have no counterparty risk. When everything stabilises I will still own the same quantity of bullion. It might be worth a bit less in fiat or more. However I’m safe in the knowledge its been sought after for thousands of years. It can’t go bust or default on debt, and with low and falling interest rates the opportunity cost of holding it is next to nothing.
You know exactly what is going on. The bond and stock markets are imploding under the weight of speculation and debt.
Apres moi, le deluge!
We are going to see failed Treasury auctions galore in coming weeks/months.
The Fed will be forced to buy ALL OF IT.
And that will finally be the beginning of the end of this corrupt, fraudulent monetary regime that we have been forced to suffer under for the past 48 and one-half years.
Too much debt in the system.
Until deleveraging via write down / write off / pay down / pay off the trend will be for LOWER rates. Any attempt at higher rates will force mass defaults. Lenders will accept less return in order to keep debt current.
A rolling loan gathers no loss.
An attempt to roll higher rates will fall back and flatten roller.
Excellent piece, Mish. Thanks!
Wanting to own Uncle Scam’s 30-year ponzi paper at a yield of less than 1.5% doesn’t seem too appealing at the moment.
Quelle surprise!
When rates go to the bottom of the range on the 10 yr, say 40 bp, sell bonds. When they go to the top of the range, say 90-100 bp, buy bonds.
Are you sure they will be AAA a year from now?
LMAO, a recession is coming? Since when are recessions the end of the world? That’s what they act like. I’m wondering what they’ll call it if a 1/3rd of us get sick and everything’s shutdown? An inconvenience?
The issue is that there is a lot of fragility in the system. In an environment where corporates are indebted up to the hilt, recessions can be catastrophic. Instead of building reserves for lean years a large number of companies blew hundreds of billions of dollars on stock buybacks. Now the chickens are coming home to roost.
No one wants to hold a mortgage and take a loss when it is called due to refi activity that picked up dramatically this week. Nobody wants to hold a mortgage when the prospects of people being furloughed without pay could very well result in no return OF investment.
Fanny and Freddy never sold a lot of the 2008 mortgage defaults. They allowed people to stay in their houses and pay rent until they could leak the inventory back into the housing market. Now what?
Thanks, very helpful.
I have some SJB which has barely moved yet. Makes sense now.
I bet Mish is happy the yield curve is less inverted. Oh, wait…he’s an economist and they’re never happy. 🙂
There’s something dismal about that smile of yours 🙁
Thank you.
I always appreciate any insight from Lacy Hunt.