Considerable attention has been focused upon the carnage in the Treasury market. The implosion in the $10 trillion corporate bond market is perhaps worse.
To get a sense of the damage, a hypothetical portfolio of high-quality debt created by the data provider BondCliq Inc.—30 bonds from the highest rated companies across various sectors, names such as NEE, AMZN. MSFT, APPL and KO-is down considerably since early 2022.
The data provider’s $1 million hypothetical portfolio that was created in early 2022 has dwindled to $612,863—eclipsing the $614,000 low reached in October last year, when the benchmark bonds were staging another big selloff.
It is a stark reminder of the way bonds work and the difference between credit risk—the probability that company might default on its debt—and interest rate risk, which can reduce the value of fixed income investments regardless of corporate fundamentals.
Average coupons on the model portfolio are around 3%. Today a new issue in these named would be around 6%. The maturity of this portfolio was more than 10 years according to BondCliq.
Most market participants have never navigated a rising rate environment. From 1983-2022 the direction of interest rates was generally down. This environment became even more pronounced in 2008 when the central banks began quantitative easing. QE ended in early 2022 and QT commenced almost immediately thereafter.
Considerable attention has been focused on bank bond portfolios and the massive losses that may threaten the capital of banks. These losses are only an issue if the bank is experiencing liquidity issues and if many depositors demand the return of their monies at once or if the bonds in the portfolio are “held available for sale” and any unrealized losses must be reflected in the capital levels of the bank.
When a bank purchases a bond, the bank will designate the position as “available for sale” which then is subject to market risk and subsequently potential risk to capital or designated as “held to maturity” where market risk is not a factor in banks holding these bonds but the available to sell the bonds is greatly reduced.
Earnings for the bulge bracket financials have generally exceeded expectations. Losses in their investment accounts appear not to be a factor.
It is widely accepted for an economy to expand; a healthy banking system is required.
Earnings for the regional banks will soon be released. Will the results parrot those of the bulge bracket firms?
Speaking of earnings, after the close both TSLA and NFLX posted results. NFLX exceeded expectations sending shares higher by 12%. TSLA missed nominally sending shares lower about 7%.
Commenting on yesterday’s market activity, longer dated Treasuries again sold off. Shorter dated Treasuries were essentially unchanged. Equities, for the exception of energy were moderately lower on Middle Eastern tension and a continued rise in oil prices.
To place the selloff in longer dated Treasuries into the proper perspective, early April this benchmark was yielding 3.31%.
Yesterday it was yielding 4.93%, perhaps under the realization that inflation is not moderating by the degree as expected and the perhaps the beginning acknowledgement that approximately 33% of the nation’s $33.5 trillion [and growing] deficit must be rolled over in the next 12-15 months at interest rates three to five times higher than the existing debt according to Fitch.
Last night the foreign markets were down. London was down 0.73%, Paris down 0.75% and Frankfurt 0.08%. China was down 1.74%, Japan down 1.91% and Hang Seng down 2.46%.
The Dow should open flat ahead of a 1200 PM speech by FRB Chair Powell. The 10-year is off 12/32 to yield 4.97%. The 30-year is 5.06% off 29/32.
