Any Explanation for this Strange Phenomenon ?

[MacroSA]

Hi Everyone,

I can’t find an explanation for what’s is happening right now in the US Markets.

As you can see in the attached picture, almost all US assets classes are dropping at the same time.
Even gold is selling or not moving at all.

Also, there is a circulating rumor that says that Goldman’s Economist are not recommending US Treasuries as a safe-haven, at least at these very low levels.
https://www.youtube.com/watch?v=KHh3vWMfaVw

I guess one possible explanation is that the market participants don’t know for sure what would be the next action taken by the US Gov.

Thx,

[thriftyandboringinohio]

Re: Any Explanation for this Strange Phenomenon ?

...I can’t find an explanation for...almost all US assets classes are dropping at the same time.
Even gold is selling or not moving at all...

Finster loves to remind us that all prices are really a ratio with a currency in the denominator. Number of apples per dollar.
When the dollar itself is becoming more valuable, the price of everything drops all together.
You get more apples for every dollar. And more umbrellas for every dollar. And more shares of Disney Corp for every dollar.

[MacroSA]

Re: Any Explanation for this Strange Phenomenon ?

Finster loves to remind us that all prices are really a ratio with a currency in the denominator. Number of apples per dollar.
When the dollar itself is becoming more valuable, the price of everything drops all together.
You get more apples for every dollar. And more umbrellas for every dollar. And more shares of Disney Corp for every dollar.

Thank you Mr. thriftyandboringinohio,

You are describing a situation similar to the 1930s-Type-Deflation!
Everything losses value against hard-currency/Gold

BTW: same question was raised, a minute ago, by Rick Santelli to Harvard University's Professor, Dr. Kenneth Rogoff.
"This is an Extraordinary Circumstance"
https://www.youtube.com/watch?v=WzJrQRrjqxs

[Milton Kuo]

Re: Any Explanation for this Strange Phenomenon ?

Thank you Mr. thriftyandboringinohio,

You are describing a situation similar to the 1930s-Type-Deflation!
Everything losses value against hard-currency/Gold

BTW: same question was raised, a minute ago, by Rick Santelli to Harvard University's Professor, Dr. Kenneth Rogoff.
"This is an Extraordinary Circumstance"
https://www.youtube.com/watch?v=WzJrQRrjqxs

I think practically anyone who isn't too new to the markets knows that deflation in the U.S. is politically impossible. I will offer a guess as to why bonds are falling in sympathy with equities. I believe the asset of choice right now is short term money--cash or Treasury notes--because people feel that Treasury bonds are quite expensive and that the Federal Reserve will do something relatively soon that will cause stock prices to go back up. If you believe that scenario but don't know exactly when in the near future the Federal Reserve will do its "magic," you don't really want to be buying bonds here at their current elevated prices. The belief is that when the Fed restores the bull market, bond prices will fall, especially so since they've gone up so much this year.

So the play is: raise short term money, wait for the Fed to do whatever it's going to do, and then buy the dip in equities and, perhaps for some people, buy some bonds *after* they fall when equities are rising.

2020-03-12 "cash or Treasury notes" should be "cash or Treasury bills"

[jk]

Re: Any Explanation for this Strange Phenomenon ?

i suspect the corporate credit markets are seizing up. if there is illiquidity in that or other markets, and especially if there are margin calls, people sell what they can sell, not necessarily what they'd like to sell.

[Southernguy]

Re: Any Explanation for this Strange Phenomenon ?

Including bonds and gold. Seems sensible to me.

i suspect the corporate credit markets are seizing up. if there is illiquidity in that or other markets, and especially if there are margin calls, people sell what they can sell, not necessarily what they'd like to sell.

[thriftyandboringinohio]

Re: Any Explanation for this Strange Phenomenon ?

i suspect the corporate credit markets are seizing up. if there is illiquidity in that or other markets, and especially if there are margin calls, people sell what they can sell, not necessarily what they'd like to sell.

Your comment here made me check corporate bond market news. All bad.
Did you know that just 6 weeks ago there were only two US companies with a AAA bond rating (Microsoft and Johnson & Johnson).

[jk]

Re: Any Explanation for this Strange Phenomenon ?

Your comment here made me check corporate bond market news. All bad.
Did you know that just 6 weeks ago there were only two US companies with a AAA bond rating (Microsoft and Johnson & Johnson).

the big deal is that half the "investment grade" market is rated bbb. about 10-11% of those are energy related btw, and thus threatened by lower oil prices. if bbb are downrated they become junk. many pension plans, etf's, mutual funds are mandated to hold only investment grade bonds, and so they will be FORCED to sell, whatever the price. this will throw into doubt the credit ratings of other bbb bonds, which may either be downgraded or sold because of fear of a downgrade.

corporate debt has never been higher. those bbb bonds, clo's [collateralized loan obligations], corporate loans, all sorts of corporate credit in non-bond form will come under pressure.

i'm sure the intial bbb downgrades will be described as "contained."

i think the coroporate credit market will be ground zero for the next meltdown.

[thriftyandboringinohio]

Re: Any Explanation for this Strange Phenomenon ?

...the big deal is that half the "investment grade" market is rated bbb....which may either be downgraded or sold because of fear of a downgrade. ..

When I looked around today a learned a new buzzword - "fallen angels"
Companies downgraded from lowest investment grade to true high yield (junk bonds)
The chatter about them implied a growing host of fallen angels (angels gather in "hosts", right? not "flocks"?)

[MacroSA]

Re: Any Explanation for this Strange Phenomenon ?

Thanks everyone for your input and contribution.
I really appreciate the help.

All markets participants know that the Fed will intervene before 20.Mar.2020 by cutting Fed's Fund Rate down to the zero level, initiate QE4, and increase the availability of liquidity in the markets. Add to that the fact that the equity markets were losing around 5% of their values during today's trading session. Nonetheless, we see the prices of all of US treasuries Notes and Bonds increases.

The following are some of the explanations that I came across except for the last one, which is my own.

I. Technical Reasons: such as closing some gaps before grounding the yields of these notes and bonds closed to zero for the next generation (review: TLT).

II. Forced Liquidation because of margin calls (see JK above comment as well as Mr. El-Erian's Tweet https://twitter.com/elerianm/status/1237833629671124992 )

III. Preparing for a crash in the equity markets: Investors are trying to raise cash to be ready to buy growth/value stocks that will generate high quality dividends at low PE ratios. (see Mr. Kuo's reply above)

IV. Uncertainty with regard to the timing and size of the "Fiscal Stimulus Plan": investors know that the Fed will implement all of its tools and they know that there will be a fiscal stimulus plan; however, they don't know if the House of Representative, controlled by the Democratic Party, will approve a sizable plan as soon as possible. Investors, also, know that it is an election year and they know that the Democratic party may want to use The President's Campaign Logo, which has been: Goldilocks economy & roaring stock markets, against him. Because of the uncertainty with regard to the Fiscal Stimulus Plan, investors are choosing flexible, easy to employ, $USD cash over Treasury's Notes and Bonds. They see a high probability of delays in the approving process of a sizable fiscal stimulus plan. That delay will cause a serious market crash, which will open the opportunity explained in the previous point (III).



With regards to the the corporate credit markets, I agree with most of what has been said about them in this thread, but I think that the Fed has them under control, at least for now. Please review the infamous ETFs: HYG & JNK. You will notice that they did not break their Monday's lows. Therefore, they can't be a major cause of what happened today in the US gov. treasury markets.


Thx again.

[jk]

Re: Any Explanation for this Strange Phenomenon ?

When I looked around today a learned a new buzzword - "fallen angels"
Companies downgraded from lowest investment grade to true high yield (junk bonds)
The chatter about them implied a growing host of fallen angels (angels gather in "hosts", right? not "flocks"?)

in the days of olde, the junk bond market consisted of fallen angels- good companies that had come on hard times, had some difficulties and were downgraded.

that all changed with the evolution of the junk bond market promulgated by michael milken in the 1980's. he promoted the issuance of bonds that were junk from day 1. they never were angels, they never fell because they started their lives in the depths, as junk. most of the junk market is junk from birth, junk forever always, not fallen angels. bbb were mostly never angels either. some were, don't get me wrong, but mostly they started life in the lower ranks of investment grade, maybe they started life as bbb from the day of issuance. and bbb, not quite junk, is not any class of angel whatsoever, so falling from bbb doesn't create a fallen angel. calling a bond that was downgraded from bbb a"fallen angel" is a real debasement of that term.

the loading on of corporate debt to finance stock buybacks to goose the value of management stock options weakened the balance sheets of many, many companies. and maybe they were or will be downgraded. a lot of corporate debt is going to have to be rolled over in the next few years. any buyers?

[MacroSA]

Re: Any Explanation for this Strange Phenomenon ?

I forget to mention one important perdition.

By the end of June, 2020, the US Treasury notes and bonds will be dead as an Investment Asset Class, because of the zero interest rates.
Also, it will be disregarded as a hedging mechanism because of the limited potential upside movement in that asset class.

No insurance company or fund manager will be able to generate the required yield needed to meet the business requirements, through the US Treasuries. This is because of the very low Yield generated from that asset class. That's why investors are starting to prepare for alternatives.

[thriftyandboringinohio]

Re: Any Explanation for this Strange Phenomenon ?

I forget to mention one important perdition.

By the end of June, 2020, the US Treasury notes and bonds will be dead as an Investment Asset Class, because of the zero interest rates.
Also, it will be disregarded as a hedging mechanism because of the limited potential upside movement in that asset class.

No insurance company or fund manager will be able to generate the required yield needed to meet the business requirements, through the US Treasuries. This is because of the very low Yield generated from that asset class. That's why investors are starting to prepare for alternatives.

The logic behind your outlook is clearly correct and its pretty compelling.

None the less, big institutions around the world have been buying sovereign bonds at rates of zero and even negative interest for a few years now.
Many trillions of dollars of negative rate bonds have been purchased and are being held now.
I don't understand it, but I know its true. And I expect it to continue.

[jk]

Re: Any Explanation for this Strange Phenomenon ?

None the less, big institutions around the world have been buying sovereign bonds at rates of zero and even negative interest for a few years now.
Many trillions of dollars of negative rate bonds have been purchased and are being held now.
I don't understand it, but I know its true. And I expect it to continue.

a lot of the buying is for regulatory reasons. i read an account of a pension fund manager in the netherlands who received a call from a regulator asking why his portfolio wasn't holding more [negative yield] bonds. he gave the obvious reply, but was told that nonetheless according to the regs he HAD to buy them, similarly they are held on bank balance sheets for regulatory reasons.

[MacroSA]

Re: Any Explanation for this Strange Phenomenon ?

III. Preparing for a crash in the equity markets: Investors are trying to raise cash to be ready to buy growth/value stocks that will generate high quality dividends at low PE ratios. (see Mr. Kuo's reply above)

IV. Uncertainty with regard to the timing and size of the "Fiscal Stimulus Plan": investors know that the Fed will implement all of its tools and they know that there will be a fiscal stimulus plan; however, they don't know if the House of Representative, controlled by the Democratic Party, will approve a sizable plan as soon as possible. Investors, also, know that it is an election year and they know that the Democratic party may want to use The President's Campaign Logo, which has been: Goldilocks economy & roaring stock markets, against him. Because of the uncertainty with regard to the Fiscal Stimulus Plan, investors are choosing flexible, easy to employ, $USD cash over Treasury's Notes and Bonds. They see a high probability of delays in the approving process of a sizable fiscal stimulus plan. That delay will cause a serious market crash, which will open the opportunity explained in the previous point (III).

“Fiscal Stimulus Plan” disagreement between the White House and Capitol Hill just started.
https://www.youtube.com/watch?v=9KrevfLwIzY

I suspect that we will witness a serious dispute, back and forth, between the WH and the Democratic-led House of Representatives early next week. This will occur while the stock markets continue to crash.

S&P is down 8.25% right now.