Treasuries Melt Down, Junk Bonds Boom, Yield Spreads Collapse

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The Hot Money returns, bets on Oil Nirvana.

The costs of borrowing for the US government are jumping. On Monday, the US Treasury auctioned $34 billion of three-month bills at a discount rate of 0.53%, the highest since October 2008.

These short-term bills sell for less than face value and are redeemed at face value. The difference is the yield for investors. For a three-month bill with a face value of $10,000, the price was $9,986.60. Holding this bill for three months until redeemed will make investors $13.40 in yield. That’s an annualized rate of 0.538%.

During the rest of trading on Monday, the yield settled down a bit, but today is up again, currently at 0.55%. While still low by historic measures, it’s up from about zero in October last year (chart through Monday’s close, via Trading Economics):

The Treasury also auctioned $28 billion of six-month bills on Monday at a discount rate of 0.645%, the highest since November 2008. It brought the annualized yield to 0.656%. It settled down later on Monday, but today it rose again, and as I’m writing this, it’s at 0.67%!

The Treasury also auctioned $20 billion in 10-year notes on Monday. In the melee, the yield briefly spiked to 2.53%, before settling at 2.49%. Today, it briefly hit 2.50% again. As I’m writing this, it is back at 2.48%. In July, it was at 1.38% (chart through Monday’s close, via StockCharts.com).

This has been the continuation of weeks of bond drama that has been called variously, “rout,” “carnage,” “meltdown” and the like [read… Government Bond & Mortgage “Carnage” Enters Sixth Week].

And it’s a global thing. Fewer and fewer sovereign bonds around the globe trade at a negative yield. Some analysts have already pronounced the end of the NIRP era, with both the ECB and the BOJ backing off ever so slightly from their scorched-earth monetary policies.




In the process of rising yields among government bonds, and falling bond prices, $1.7 trillion of the bond bubble’s gains went up in smoke in November alone, according to Bloomberg.

But even as the government bond bubble is bursting, it’s party time at the bottom end of the bond market. The prices of the worst of even the worst energy junk bonds have soared, as have the prices of many other junk bonds. The junk-bond market is now pricing in a return of oil-nirvana.

The deal that OPEC and non-OPEC countries worked out may well disintegrate into pandemic noncompliance. And the US shale producers have no appetite for cutting production, especially now that new money is flowing back into the sector. The US rig count has already jumped 54% from the low point in May to 624 rigs in the latest week. Everyone in the industry is licking their chops. This oil bust is over. Drillers are getting busy again. Production growth is back.

This phenomenon – OPEC and non-OPEC noncompliance along with rising production in the US – is going to have consequences for the oil glut that continues unabated today. But no matter. The hot money is rushing back into the sector.

And so with Treasury bonds getting beaten down and Treasury yields jumping, while the opposite has been the case month after month at the junk-bond end, particularly in the energy sector, the spreads between Treasury yields and junk-bond yields have collapsed.

Here is the options adjusted spread between Treasuries and BB-rated junk bonds (the higher end of junk). The spread of 2.66 percentage points is the lowest since September 2014, when QE was still going on, albeit in tapered form, and before the oil bust was taken seriously:

And the low end of the junk-bond spectrum, the riskiest end, where bonds are teetering somewhere near default, has become the place to be for the hot money, as these bonds, many of them energy bonds, have soared in price, and yields have dropped to bond bubble levels. The current yield spread of 10.1 percentage points over Treasury bonds is less than half of where it had been on February 11:

In other words, the junk-bond bubble is back, alive, and well, driven largely by the recovery in energy junk bonds, as if the losses, restructurings, and bankruptcies had never occurred.

To make this equation work, the hot money is, ironically, banking on some kind of miracle that OPEC and non-OPEC producers, particularly Russia, are going to perform, apparently out of the goodness of their hearts: cutting their own production in order to give US shale drillers another chance, allow them to gain market share, and enrich their investors.

But something tells me that somewhere along the line, something doesn’t add up in this equation, and that this renewed junk bond bubble is immensely vulnerable.

What are bank insiders seeing from their perch that we don’t? Read… If Everything is so Bullish, Why Are Bank Insiders Dumping Their Shares at Record Pace?




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  28 comments for “Treasuries Melt Down, Junk Bonds Boom, Yield Spreads Collapse

  1. Dec 13, 2016 at 3:06 pm

    All betting that demand will somehow rise and production will not..

    • Frederick
      Dec 13, 2016 at 3:15 pm

      For demand to rise people will need jobs and Im not seeing that happening worldwide Production may well rise if the OPEC deal fails which it ineviteably will

  2. Petunia
    Dec 13, 2016 at 5:05 pm

    When the new incoming Treasury Secretary mentioned 100 year bonds, I immediately suspected he plans on issuing 100 year zero coupon bonds. This is the only way they can kick the can down the road with a band wagon of willing participants. A 5% 100 year zero is only $7.60. Even I can afford that. You can think of it as a lotto ticket.

    They can offer a higher than average yield and don’t have to worry about a payout for 100 years. They will still be extremely liquid marketable securities. I don’t even think it’s a bad idea, if I do say so myself. At this point what difference does it really make.

    • Chicken
      Dec 13, 2016 at 10:09 pm

      Bingo, Petunia has it. The 30/100yr issues are the solution.

    • Syka
      Dec 14, 2016 at 1:14 am

      Wolf, even in a rising Rates World, rolling the Stock of Treasury could even end up in lowering Servicing costs for 2017 !!! Almost Half of the Treasury Stock to be rolled next year is made of Zero Coupon. At the current rate increase it’s an additional 4-5 Blns Servicing cost to be added. Next there are 2 Bonds Issues of 20 Yr each that originally came with an average 8.8% Coupon !!! So in effect it would be CHEAPER to roll them at current Market Rates. Next there are a lot of 10 Yrs. I don’t remember the exact figure but the cost of rolling at present day would not be adding a lot. So even in a rising rates environment (to the extent it is not exploding), Federal Debt Servicing will not be an issue for long time…..No the real issue is the Federal Deficit that would explode should Trump been able to implement his policies of spending…..

      • TS Securitization
        Dec 14, 2016 at 9:20 am

        McConnell is not on board with the large infrastructure stimulus ala Supreme Leader Trump unless he has offsets. SO as to not blow the deficit up too much. Its all going to be real interesting when, during this administration, if you can call it that, what the FED is left with when the next recession arrives sooner rather than later.

        Unless better jobs are forthcoming for those silly enough to elect the Supreme Leader the tax base will continue to shrink. More will retire(boomers), and lots more mid class pain is on the way. Deal with automation now and provide a liveable national income in the future or it will all burn down as the voters of Trump get poorer and better armed LOL

        • Petunia
          Dec 14, 2016 at 10:47 am

          McConnell and the rest of them voted to increase the debt ceiling every single time. They are so full of **** I don’t know how any of them got re-elected.

        • Smingles
          Dec 14, 2016 at 12:27 pm

          “McConnell is not on board with the large infrastructure stimulus ala Supreme Leader Trump unless he has offsets. SO as to not blow the deficit up too much.”

          I’ll believe this when I see it. Republicans have never met a spending bill they didn’t like so long as a Republican Congress wrote it and a Republican Pres signs off on it.

          Never forget Dick “Deficits Don’t Matter” Cheney. You can make up the numbers as you go. Adding a few hundred billion in spending will actually be positive for the deficit because it will make the economy grow that much faster and generate that much more tax revenue. Insert bullsh*t numbers here _________ .

          Mark my words.

      • chris Hauser
        Dec 14, 2016 at 10:21 pm

        very good. thank you.

        seems to me that the cost of something going from very little to a bit more isn’t much.

        get out there and borrow.

        wait, did i say that?

    • nhz
      Dec 14, 2016 at 4:42 am

      Just a few days ago I read about the recent carnage in 100-year bonds from Belgium. People who buy this stuff deserve what they get, they are lining up for massive abuse. But my guess is that most of the ‘victims’ are people playing with OPM so the charade will continue :-(

  3. Dan Romig
    Dec 13, 2016 at 5:24 pm

    ” … it’s up from about ZERO in October of last year …” pretty much sums it all up to a tee. When in the history have we had people lending money out and hoping to get the same, or just a bit less back later?

  4. AlbieOk
    Dec 13, 2016 at 7:18 pm

    The thing we learn from history is that we don’t learn from history. And history now seems to be measured in months, not decades.

    • number1gi
      Dec 13, 2016 at 9:40 pm

      “history now seems to be measured in months, not decades.”

      The future as well.

  5. Tom kauser
    Dec 13, 2016 at 9:14 pm

    Trump put_
    Wall street will force congress to build a lot of stuff with fresh printed trump debt(ez way out #40 trillion before 10 trillion!) or figure out an other way out.

    • Chicken
      Dec 13, 2016 at 10:14 pm

      Trump and the reaction give me the impression democrats have lost their battle to suppress growth in favor of environmental concerns.

      Don’t worry, the next 8 years will fly by.

      • night-train
        Dec 14, 2016 at 3:39 am

        We will be luck if we have 8 more years period. But, what the heck. I’m old, so I doubt if any of this will matter to me.

        • Chicken
          Dec 14, 2016 at 12:41 pm

          Then you’re old enough to have watched middle class opportunities circling the drain with every unfavorable act of Congress.

          Agree, there’s a lot of damage to be undone and Rome wasn’t built in a day.

      • Smingles
        Dec 14, 2016 at 12:24 pm

        Right. I mean, who cares about clean air and water for the little people when you can juice the economy for an extra 1 or 2% of GDP growth, 80% of which goes to straight to the wealthiest people in the history of the planet?

        Right Chicken? Maybe if you’re lucky you’ll get some bread crumbs.

        • Chicken
          Dec 14, 2016 at 12:52 pm

          Can’t blame past policies on Trump, please explain how offshoring is an effective environmental policy?

  6. Veleje
    Dec 13, 2016 at 9:52 pm

    What could possibly go wrong….

  7. NotSoSure
    Dec 14, 2016 at 12:18 am

    Well yours truly bet against junk bonds as a hedge and darn if that thing hasn’t rallied.

  8. night-train
    Dec 14, 2016 at 3:53 am

    The OPEC deal has 0% of holding together. The OPEC-Non-OPEC deal has a less than 0% chance. The good old oil patch where hope springs eternal. And suckers keep buying the dream. This is not the beginning of a new oil boom.

    • Frederick
      Dec 14, 2016 at 4:13 am

      Crude is lower as we speak Inventory build was bigger than expected Why am I NOT surprised?

  9. Meme Imfurst
    Dec 14, 2016 at 8:18 am

    As long as the OPEC nations need to buy weapons, and we make more sophiciated expensive weapons for them to buy, then the OPEC nations will cheat. Dog eating it’s tail. Most OPEC nations are broke or near broke, so buying bonds is not in the cards as it was a few short years ago. They can’t cut back on subsidies and gifts to the people for fear of a revolt, so they will cheat to raise money before their neighbor beats them to it.

    Are bonds any different? Different players, different assets, different grades, but it becomes a cheaters paradise when the need for ‘income’ takes precedence over ratings and undermines the entire market.

  10. Uncle Frank
    Dec 14, 2016 at 8:40 am

    “The junk-bond market is now pricing in a return of oil-nirvana.”

    Of course they are. Trump is creating a government of, by, and for the oil and gas industry.

    • Smingles
      Dec 14, 2016 at 12:48 pm

      Frank, that’s not fair.

      You forgot to include bankers.

      • Jas
        Dec 14, 2016 at 11:09 pm

        Since you mentioned it, don’t forget the lobbyists and arms deals.

  11. economicminor
    Dec 14, 2016 at 12:40 pm

    The gaming of the markets just amazes me. King Copper has had a rally which would lead me to want to believe that we have bottomed. Copper is used in buildings and tech and appliances and probably a lot of things having to do with the fence (if it ever actually gets build).

    As for fake news, Market Watch said retail sales up slightly yet zerohedge shows that it is actually down somewhat. MW (good ole animal spirits?) is trying to encourage people to spend and ZH is fake news.. hahahaha!

    So much speculation it is impossible for me to invest. All I can do to not lose as much is stay on the side lines.

Comments are closed.