jueves, 17 de diciembre de 2015

jueves, diciembre 17, 2015

Be Careful About That Junk Bond Crash: This Time Really Is Different
     
- This time is going to be different is a very dangerous belief. 
       
- And crashing junk bond markets do indeed often signal stock market crashes. 
       
- Yet with QR, this time really is different.
Your colleague and mine, Michael Snyder, has just told us that the junk bond market is crashing, which it is. Further, that such crashes are usually followed by the stock market toppling over: also true. However, it would be a bit of a mistake, in my opinion, to think that this junk crash is going to lead to the stock market doing so, simply because sometimes this time really is different.

And the difference here is the actions of the Federal Reserve in their quantitative easing program, which as they start to raise rates again are obviously beginning to reverse.

Snyder:
The extreme carnage that we are witnessing in the junk bond market right now is one of the clearest signals yet that a major U.S. stock market crash is imminent. For those that are not familiar with "junk bonds," please don't get put off by the name. They aren't really "junk." They simply have a higher risk and thus a higher return than other bonds of the same type. And yesterday, I explained why I watch them so closely.  
If stocks are going to crash, you would expect to see a junk bond crash first. This happened in 2008, and it is happening again right now.

Okay, I'm perfectly willing to agree with that. However, we do need to think about what QE was set up to do.

Central banks do not control interest rates: The Fed doesn't even control the Fed Funds rate.

However, they can obviously influence them; that influence becoming ever more tenuous as we move out along the maturity curve. Long-term interest rates are almost entirely market set; short-term ones have a great deal more central bank influence upon them.

When we hit the nominal zero lower bound, the Fed still wanted long-term interest rates to fall further: that's what QE was all about - make safe bonds (i.e., Treasuries and close substitutes) more expensive, thus lowering the yield upon them. Given the hunger of investors for income, they would move out along the risk curve. This will lower long-term interest rates.

Great, that's what they did and it worked.

So, here we are now, rates are about to start rising again. No, this isn't quite the same as a reversal of QE, but it's a very close substitute. So, what would we expect investors to be doing?

Coming back in along that risk curve as yields on safer assets start to rise.

I would not insist that this interpretation of events is correct. I only put it forward as an alternative.

As QE ends and rates rise, we would expect the elevated levels of prices out at the riskier end of the market to fall, simply because the point and purpose of all that QE was to lower prices out at that riskier end.

This time really is different.

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