{"id":75693,"date":"2015-07-24T05:08:10","date_gmt":"2015-07-24T09:08:10","guid":{"rendered":"http:\/\/countingpips.com\/?p=75693"},"modified":"2015-07-24T07:31:11","modified_gmt":"2015-07-24T11:31:11","slug":"bond-market-upheaval-is-upon-us","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/07\/bond-market-upheaval-is-upon-us\/","title":{"rendered":"Bond Market Upheaval Is Upon Us"},"content":{"rendered":"
July 24, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"Bond<\/p>\n

By Alan Gula<\/a>, Chief Income Analyst <\/em><\/p>\n

Since the beginning of 2009, the U.S. 10-year yield has averaged around 2.6%.<\/p>\n

Consequently, most people feel that interest rates have nowhere to go but up. However, from 1930 to 1955, the U.S. 10-year yield also<\/em> averaged 2.6%. That\u2019s 25 years! There was even a double-digit annual inflation rate after World War II, yet rates stayed low.<\/p>\n

Most people fail to realize that interest rate cycles can last a very<\/em> long time.<\/p>\n

Furthermore, the forces conspiring to keep a lid on growth and inflation \u2013 and hence interest rates \u2013 are secular (long-term) dynamics. We\u2019re in the latter stages of a historic global debt supercycle. Many developed economies are faced with aging populations and a decline in their labor forces. Plus, technological advancement is producing a good type of deflation as well as contributing to a growing glut of low-skilled labor, thereby pressuring wages.<\/p>

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These factors aren\u2019t going away any time soon, which is why I don\u2019t believe our biggest risk is a meaningful jump in interest rates. However, a bond market upheaval does appear to be upon us, even if the risks are ignored in the financial media because the facts don\u2019t fit the \u201cTreasuries are in a bubble so buy stocks\u201d narrative.<\/p>\n

The bond market revolt is in credit. High-yield energy bonds are going \u201cbidless\u201d with increasing frequency. Linn Energy\u2019s<\/strong> (LINE<\/a>) 8.625% coupon bonds due 2020 have plunged from $90 in June to $60.50 as of this writing. Astoundingly, these bonds traded at par ($100) at the beginning of November 2014, when I warned about energy sector leverage<\/a>.<\/p>\n

SandRidge Energy\u2019s<\/strong> (SD<\/a>) 8.75% coupon bonds due 2020, which were just issued<\/em> on May 28, 2015 at par, have already declined to $74. This is an ugly consequence of the \u201creach for yield\u201d phenomenon.<\/p>\n

The bonds of basic materials producers are getting clubbed in similar fashion. AK Steel\u2019s<\/strong> (AKS<\/a>) 7.625% coupon bonds due 2020 have declined from more than $90 to $60 in a little over a month.<\/p>\n

Lest you think that the bond market dislocation is confined to the commodity complex, let me point out that investment-grade (IG) credit spreads are widening. Credit spreads are the additional yield above Treasuries an investor can earn from corporate bonds due to their higher risk.<\/p>\n

In December 2014, I noted that benchmark single-A credit spreads<\/a> had started to widen, which has continued as you can see below:<\/p>\n

\"Investment-Grade<\/p>\n

Spreads have bounced off of the key 1% level and are now back to late-2013 levels. Keep in mind, these aren\u2019t small, overleveraged oil exploration and production companies. Many large, blue-chip multinationals carry single-A credit ratings.<\/p>\n

So, the risk aversion in the credit markets ranges from junk to high-quality issuers. This represents a big-time divergence with the equity market, which has continued to rally, although with deteriorating breadth.<\/p>\n

Seemingly everyone believes the biggest risk out there is rising interest rates. Because of this facile view, they\u2019re missing the real message the bond market has been sending.<\/p>\n

Given the aforementioned secular forces and the fact that the credit (default) cycle is of a much shorter duration than the interest rate cycle, credit spreads are likely to blow out well before interest rates rocket higher. In fact, it\u2019s already starting to happen.<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

The post Bond Market Upheaval Is Upon Us<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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By WallStreetDaily.com By Alan Gula, Chief Income Analyst Since the beginning of 2009, the U.S. 10-year yield has averaged around 2.6%. Consequently, most people feel that interest rates have nowhere to go but up. However, from 1930 to 1955, the U.S. 10-year yield also averaged 2.6%. That\u2019s 25 years! There was even a double-digit annual […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-75693","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/75693","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=75693"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/75693\/revisions"}],"predecessor-version":[{"id":75711,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/75693\/revisions\/75711"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=75693"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=75693"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=75693"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}