Tuesday, November 10, 2015

Why Are Primary Dealers Liquidating Corporate Bonds At An Unprecedented Pace.......ANOTHER PESKY FACT


Why Are Primary Dealers Liquidating Corporate Bonds At An Unprecedented Pace

Why would dealers be liquidating their corporate bond portfolios at such a fast pace?

For junk, the obvious answer is that with ongoing concerns around rising leverage, not to mention yields being dragged higher by the ongoing pain in the energy sector, this may be merely a proactive move ahead of even more selling.

But for Investment Grade the answer is less clear, and the selling likely suggests fears that any December rate hike will see spreads blow out even further, and as a result dealers are cutting their exposure ahead of December.

Whatever the answer keep a close eye on this series: if Dealer net positions turn negative it will mean that the corporate buyback door is about to slam shut in a hurry as others begin immitating the 'smartest and most connected traders in the room', depriving corporations of their biggest source of stok buyback "dry powder." In fact, taken to its extreme, if companies suddenly find it problematic to raise capital using debt, we may soon enter that phase of the corporate cycle best known by a spike in equity issuance, whose impact on stock price is just the opposite to that of buybacks.

As the charts below show, the Primary Dealers aren't waiting for the December announcement to express how they feel about their holdings of both Investment Grade and Junk Bond (mostly in the longer, 5-10Y, 10Y+ maturity buckets where duration risk is highest).

As of the week ended October 28, Primary Dealer corporate holdings tumbled across both IG and HY, plunging to the lowest level in years in what can only be called a rapid liquidation of all duration risk.


Investment Grade Bonds:



And Junk Bonds:





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