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Friday

Jul302010

Corporates Soar

Friday, July 30, 2010 at 02:09PM

The big gain in Treasuries has been a major business news headline over the past few months. But the corporate bond market has also been doing exceptionally well. Below is a chart of the investment grade corporate bond ETF -- LQD. The ETF has gained more than 5% since the start of June, and has now been trading about two standard deviations above its 50-day moving average for many weeks now.

Preferred stocks haven't been doing bad either:

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Reader Comments (6)

Bond price movements are not normally distributed, and have price movements that are often serially correlated. It could stay in the red zone for a while. Much money seeking safe havens.

July 30, 2010 |

David Merkel

Given the rally in Treasuires it would be interesting to examine spreads over this period. How much have corporate spreads rallied?

July 30, 2010 |

LevFin

flight to quality mark II?
the sky ain't safe no more...

July 31, 2010 |

Tony

Yes corporate bonds, LQD, has soared, I track CFT which is similar to LQD. This last week, both saw a powerful jump up in their charts on Friday.

“Peak credit” likely occurred Friday July 30, 2010; and thus “credit deflation” that is “bond deflation” and “sovereign debt deflation” will commence beginning in August 2010 with interest rates going higher across the board.

Aggregate Bonds, AGG, jumped higher from its previous July 21, 2010 high, manifesting a black lollipop hanging man candlestick; US Government Notes, IEF, manifested a black lollipop as well; and US Government Bonds, TLT, popped higher. The chart of AGG, TLT, IEF, CFT, CMF, HYD makes for a handy reference chart. The jump higher in bonds today suggests that peak credit is occurring …. and that …. “credit deflation” is coming soon.

Chart of aggregate bonds, AGG, shows the lollipop hanging man candlestick.

Chart of the US Government Ten Year Note, IEF shows a topping out in the US Ten Year Note.

The fall in Anworth Asset Mortgage, ANH, confirms peak credit has occurred.

Corporate Bonds, CFT, rose strongly to 106.06

High Yield Bonds, HYD, fell lower.

Junk Bonds, JNK, fell lower.

California Municipal Debt, CMF, fell lower.

Municipal Bonds, MUB, fell lower.

High yield municipal debt, HYD, fell lower.

Mike Mish Shedlock writes California approaches “fiscal meltdown”; The chart of CMF Daily presented below shows its dramatic rise as investors have sought safe haven from stock debt deflation.

Investors have found significant reward by investing in California debt as seen in CMF weekly.

BAB rose slightly above resistance. Michael McDonald and Esme E. Deprez of Bloomberg report on July 30, 2010: “New York City will sell $470 million of Build America Bonds next week with the amount of the federally subsidized securities issued on pace to total $165 billion by year-end, when the program is set to expire … Build America Bonds became the fastest-growing part of the $2.8 trillion municipal bond market after they were created last year in President Barack Obama’s economic-stimulus package. More than $124 billion of the securities have been sold so far … The federal government pays 35% of the interest cost of Build Americas, saving states and cities money on public works projects … The subsidy helps issuers offer higher yields on the taxables than on tax-exempt debt, making them attractive to international investors and others who aren’t seeking tax shelters.”

The spike down, in the $TYX, that is the 10 Year Yield to 3.87 on July 1, 2010, and the rise in the Direxion 300% inverse of the 30 Year US Government Bond, TMV, suggests that interest rates are on their way up. And the US Dollar, $USD, also began its fall on July 1, 2010; so July likely marks the month for the tide turning for rising interest rates and a falling US Dollar.

The fall in the 300% inverse of US Government Bonds, TMV, represents a good entrance point for short sellers.

“Credit bosses”, that is credit seigniors, will oversee the disbursement of credit in the US and Europe.

Here in the US, I envision, that out of a coming credit crisis, where there is no credit available, a Financial Regulator, will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve. Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have done servicing mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.

I also envision that this Credit Seignior, perhaps in public private partnership with American Express, AXP, and Capitol One Finance, COF, will provide seigniorage for credit. He will issue credit mostly to those companies which serve strategic national needs.

In Europe, I envision a new role for the President of the ECB. I envision that in response to severe credit contraction and banking ill-liquidity, that he also will be Credit Seignior, as he accepts sovereign and other debt and issues credit to Eurozone member banks thereby keeping some degree of money liquidity flowing.

I also believe that as credit deteriorates the value of excess reserves will rapidly decrease as well. Dr. Housing Bubble in article Japan Iwato And Heisei Stock And Housing Bubbles presents a chart of Excess Reserves totalling over $1 Trillion at the current time. These are largely the US Treasuries that the Federal Reserve swapped out to recapitalize the banks through its QE TARP Facility. The so-called excess reserves are residing at the US Treasury. As the value of US government bonds, IEF, and TLT, and ZROZ, falls lower, the value of the excess reserves will shrink dramatically in value, as either the banks pull them and sell to stay capitalized or simply “rot on the vine” so as to speak.

Gold is the ideal safe haven and liquid investment for the personal investor now that we are passing through peak credit.

Personal investors may want to consider investing in gold. Jesse in chart article provides the chart of gold, $GOLD indicating a base of $1,155; it traded last at $1,180. Institutional investors many want to consider some small and gradual investments in the double long gold ETF, DGP, at its current price of 30.00; investors should be aware that it could easily fall lower to 29.00, 28.50, 28.00; with 27.75 being the furthest this ETF is likely to fall, as this price occurred when gold rapidly broke out on April 1, 2010 on concerns over Greek sovereign debt. In addition to the ETF, DGP, institutional investors may want to consider investing in Volatility, VXX. as well. Overall for institutional investors, I believe the ETFs, DGP, VXX, TMV, the Profunds UKPSX, and the Direxion DXRSX will provide the best financial return for institutional investors.

Gold, GLD, rose to resistance at 115. Support is lower at 114, 113 and 112. It will either break out here, or at one of those lower levels as investors transfer out of bonds, AGG, and stocks, VT, fall lower, and as the yield curve, $TYX:$TNX, continues to STEEPEN. The dark cloud covering candlestick in the yield curve suggests that investment demand for the Ten Year note, relative to the Year Bond, is over. And that a top in the ten-year note, IEF, is now in.

And the yield curve $TYX:$TNX in manifesting a dark cloud covering candlestick, suggests that the yield curve will cool for a bit, before it continues on even higher, as debt deflation raves fiat investments.

August 1, 2010 |

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August 19, 2010 |

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