Debt traders are hiding out and waiting for the storm to pass -- if they can.
Rather than try to understand this turbulent, nervous market, many investors seem to be standing down if they have any choice in the matter. For example, trading volumes in investment-grade and high-yield bonds dropped near the lows of the year on Monday, with the $16.7 billion of activity far below 2016’s daily average of $25 billion.
Those who have to sell, or who happen to enjoy stomach-churning risk, are concentrating their activity in a smaller subset of frequently traded bonds. As a result, this debt seems to be getting disproportionately punished or rewarded for its liquidity. Perhaps this is part of the reason that the most-senior debt of financial firms, among the most-active corporate bonds, has suffered so much on so little fresh information.
On Monday, for example, as markets whipped themselves into hysteria over possible problems among big European banks, risk-averse traders piled into Treasuries, sending yields on 10-year notes down to the lowest in a year. They fled junk-bond exchange-traded funds, with shares on the two biggest such funds falling to the lowest since 2009.
Bonds of Sprint and Charter Communications, some of the biggest junk-bond issuers, also sold off, dropping 2.7 percent and 2.5 percent respectively in just that one day. There wasn't any specific, notable news to precipitate this -- it was simply a matter of investors selling what they could to quickly raise money.
One asset class that held up fairly well, all things considered, was the $800 billion market for U.S. leveraged loans, which don't generally trade as frequently as many stocks and bonds. This speculative-grade debt declined 0.14 percent Monday, compared with a 1.2 percent daily plunge in dollar-denominated high-yield bonds.
The good news is the focus on the most-liquid bonds indicates that the selloff has been relatively emotional. It's hard to see how JPMorgan, Wells Fargo and Citigroup would be unable to repay their senior bonds in the near term despite what some market moves may suggest. It seems highly unlikely that we're on the precipice of another financial crisis akin to 2008, despite the plunge in lower-ranked European bank bonds this year.
The bad news is the jittery mood could indicate that there's a lot more pain to come, especially when investors are forced to sell harder-to-value securities. The selloff suggests yet another leg down in the massive destruction of wealth that has taken place over the past 18 months in the wake of the collapsed commodities bubble.
Billions of dollars have simply been eliminated from the financial system, with sovereign wealth funds tapping into their holdings to support government spending and hedge funds collapsing under the weight of souring assets. The destruction prompts selling, lots of it.
It's unclear how far along we are in the mass elimination of perceived value, created in large part by unconventional central bank policies. This trend could ultimately spell danger for companies big and small. But for now it would be unwise to make too many assumptions based on specific, sharp moves in frequently traded assets.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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