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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
|
0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Two Clear Warning Signs From the Corporate Bond Markets |
Seeking Alpha - By Peter Tchir
Credit markets have been performing well all year. The returns, while not outstanding have been incredibly consistent. There has been an eerie calm to the market. Most recent articles relating to the corporate credit market remain bullish - even those who don't like the overall yields argue that the spreads are attractive.
Seeking Alpha has run two articles (I, II) that were bullish on bond ETF's, and Mr. Santoli's column in last week's Barron's are just a few examples of the bullish outlook for corporate bonds.
While the bullish case may be true, there are two leading indicators of potential trouble in the credit market have popped onto my radar screen.
I have always found that the performance of recently-issued bonds is a good lead indicator for the credit market. These bonds are not performing well any longer, and the trading volume is getting very thin according to market makers and investors I communicated with. This signal occurs fairly infrequently, and has been a very good indicator for me of future credit moves.
Furthermore, CDS indices are trading cheap to fair-value, and that cheapness is persisting longer than it has recently according to Bloomberg data. This signal sends more false positives than watching recent new issues, but it is still useful when analyzing the downside potential of the credit market. I'm not yet concerned about flows, but there are a couple of small signs showing that flows are slowing if not reversing.
It's getting to the point that it makes sense to sell cash rather than buying CDS as the next leg down should see them move equally; whereas on a rally, the CDS indices in particular will outperform cash as the weak hedges are taken out of the market. In ETF land, selling iShares iBoxx High Yield Corporate Bond ETF (HYG) and SPDR Barclays Capital High Yield Bond ETF (JNK) makes sense, or selling iShares iBoxx Investment Grade Corporate Bond ETF (LQD) and buying iShares Barclays 10-20 Year Treasury Bond ETF (TLH). LQD vs. TLH is a reasonable attempt at putting on an investment grade credit spread trade. Going outright short LQD without a rate hedge is more costly and potentially more dangerous - though with Treasury yields next to nothing, it might not be that dangerous.
Recent New Issues Underperforming
The recent new-issue market is performing poorly. I focus on bonds issued in May prior to May 23, the Bloomberg new issue calendar. I don't include bonds more recent than that because they still have too much noise from the underwriters using their net short position on the break to support the bonds. They are also recent enough that underwriters are more reluctant to down bid them. Bonds issued 3 to 5 weeks ago should still be doing fine. They came at a concession to the market and were well oversubscribed at the time.
Yet, of the 60 bonds I looked at, 42 were trading wider than their issue price, and the average spread is 9 bps wider than the 254 spread they came out at, according to Bloomberg and TRACE data. These are bonds that were priced at a concession, were oversubscribed, mostly traded tighter on the break, and the underwriter likely started net short.
Volumes are declining too. Recent new issues becoming illiquid so quickly and seeing their spreads widen is a great warning signal for the market as a whole. In my sample I only included bonds in the 5-to-10-year maturity range, corporate issuers, and deals of at least $500 million, to eliminate the quirks of the short- and long-dated end of the credit market, and the potential that small issues were held by only a couple of buyers.
The GOOG 3-5/8s of 2021 are a good example of the performance of these recent new issues. It came on May 16 at T+58. The bonds broke marginally tighter and closed the first day at T+55. These bonds are now trading at T+78 according to TRACE. The volumes have also dropped, and talking to bond investors, it is getting harder to get dealers to make a firm bid for this sort of paper. Traders are complaining that the bulk of the selling interest is coming from these recent new issues, and that the client bid side has disappeared.
For the complete article.
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