Tremors in the high yield debt market reverberated through the financial markets Friday, and speculation over what comes next came in a close second all weekend, losing out only to the weather.
The decision by Third Avenue to close their High Yield Fund while halting redemptions, was done with best intentions for all investors, allowing them to liquidate the fund in an orderly manner over the next few months rather than make forced sales at “panic in the street” prices…….Really?
The move by Third Avenue sparked a mass exodus among holders of High Yield ETFs as well as an overwhelming interest among anyone with exposure to high yield to sell, or hedge what they couldn’t sell (most of it), by selling high yield surrogates or derivatives.
An extreme example of this was noted Friday in Barrons.com and again by Randall Forsyth in his Up and Down Wall Street column. A very large “Put Spread” options trade in HYG was done Thursday, in which the buyer bought approximately $1 billion of downside protection in the HYG.
This is an options trade of epic proportion.
High Yield Horrors | Capitulation, or the Start of Something Worse?
The day quickly became an exercise in “sell what you can, if not what you want to” as investors with exposure to anything resembling risk assets moved to raise cash. In many cases this resulted in selling highly liquid securities whose market could absorb hundreds of times more volume than the high yield bonds under question.
It also produced record volumes by a mile among high yield ETFs. Consider the high yield ETF, HYG. Citigroup put out a note after the close highlighting that Friday’s volume in HYG of 54 million was more than double the prior record volume that had only been set on Tuesday. No doubt some volume was attributable to the ginormous put spread trade Thursday, but record volume by 2x cannot be “one offed”.
So of course the big debate the market is having with itself is:
Was this a capitulation low, for High Yield?
Or are we entering a new stage of de-risking some of which has been in motion since the Global Financial Crisis of 2008-09?
This is a near impossible question to answer the same day or the day after, but when you consider that High Yield metrics traded at their lowest prices since the depths of the GFC in 2009, with easily surpassed record volumes on Friday, if it’s not capitulation, I don’t know that I want to see it when it finally happens.
The Early Line: Equity futures opened higher with a steady bid hours ago after European markets showed gains in the first hour of trading. Gains in the Eurozone have faded to losses at midday and US Equity futures are now anticipating a modestly lower opening.
Oil continues under pressure down 3%, trading under $35 for the first time since the spring of 2009.
As a point of reference, the closing low print in Oil from the depths of the 2008-09 GFC was $32.30 in December 2008. If we get threateningly close to that level on further weakness, the hype and the bearishness might be strong enough to help ignite a trading rally