Aug 14


This Alarming Indicator Is Back At A Level Last Seen 10 Days Before The Bear Stearns Collapse (ZeroHedge, Aug 14, 2015):

One of the most disturbing and recurring themes highlighted on this site over the past year has been the ever greater disconnect between the worlds of equity and fixed income, whether in terms of implied volatility, or actual underlying risk.

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It turns out there is an even more acute, and far more concerning divergence, which was conveniently pointed out overnight by Bank of America’s Yuriy Shchuchinov, one which again looks at the spread between credit and equity. Specifically, BofA notes that in just the past two weeks, credit spreads from our HG corporate bond index have widened another 9bps to 164bps while equity volatility is down another percentage point (although technically BofA uses the 3rd VIX futures as its measure of equity volatility rather than VIX itself to get a smoother series that is less affected by the daily noises and seasonalities).

This is how the resulting dramatic divergence looks like:

BofA on Bear 1

Why is this notable?

In BofA’s own words: “this spread currently translates into 10.26 bps of credit spread per point of equity vol, the level reached on March 6, 2008 – ten days before Bear Stearns was forced to sell itself to JP Morgan for $2/sh. Recall that – unlike the credit market – the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis.”

BofA on Bear 2

In other words: unprecedented equity complacency matched by a state of near bond market panic.

BofA is quick to note that it is “not predicting another financial crisis” but believes “it is important to keep highlighting to investors across asset classes that conditions in the high grade credit market are currently very unusual.”

BofA’s conclusion:

The key reason for this weakness is that our market has transitioned from “too much money chasing too few bonds” to “too many bonds chasing too little money”. That shift is motivated by the impending Fed rate hiking cycle as issuance, M&A and other shareholder friendly activity has been accelerated while at the same time demand has declined. Again, we are not trying to predict a crisis – only to point out that the upcoming rate hiking cycle appears to concern issuers and investors so much that they have been taking real actions that have repriced our market lower relative to equities to an extent that we have only seen during the financial crisis.

And, of course, there is the whole deflationary commodity collapse-slash-China crash/devaluation/bursting credit/housing/market bubble, which also is a screaming read flag, but which stocks have also decided to ignore because, well, “central banks got their back.” Until they don’t.

In the meantime, we can’t wait to find if this is the first time in the history of capital markets when it is stocks that are right, and bonds wrong. Because if not, we are confident that nobody, certainly no equity traders, is positioned in a way that another Bear Stearns-type blow up will be merely chalked away to the ever growing list of things that one should simply ignore and focus on an S&P which remains just a few percentage points below its all time record high.

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One Response to “This Alarming Indicator Is Back At A Level Last Seen 10 Days Before The Bear Stearns Collapse”

  1. Marilyn Gjerdrum Says:

    “Credit spreads from corporate bond index have widened another 9 basis points spread to 164 while equity volatility is down another percentage point.”

    This ought to terrify anyone.

    “Technically B of A uses the 3rd VIX (thats the volatility index) futures” ???
    WTF?? Why not? The VIX has been an excellent warning index, people made millions on it in 2008-2009……Why has this bank cooked up some twisted futures index?

    B of A using this twisted futures as its measure of equity volatility rather than the VIX itself?

    Why? The VIX proved itself in the 2008-09 crash as an excellent predictor of the markets…….

    They have developed the 3rd VIX futures “to get a smoother series that is less affected by the daily noises and seasonalities”……
    Again, WTF?

    We have no credible regulators or laws left….the greedy guts now control our markets. For anyone who thinks that will protect the portfolios of millions, they better think again.

    Currently, we have a few individuals controlling large funds of hundreds of millions of dollars. They ply their individual agendas and control the markets……until they don’t…….

    The truth is implacable, and eventually, it comes out, especially in financial matters. Look at those numbers above……….nothing can keep it going forever. The market is showing warning signs even the greedy guts cannot control.

    “Credit spreads from corporate bond index have widened another 9 basis
    points spread to 164 while equity volatility is down another percentage point.”

    If anyone doesn’t understand the portend of that statement, they better find out.
    Thanks for posting this story.

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