Weekly Commentary: $150 Billion Global Corporate Bond Binge
After an extraordinary August, markets are showing no inclination for stability to begin September. Jumping 1.3% Thursday on news of an October restart of trade talks, the S&P500 gained 1.8% for the week. The S&P500 ended the week less than 2% from all-time highs. The Semiconductors surged 4.2%, increasing 2019 gains to almost 36%. The Nasdaq100 advanced 2.1% (up 24.1% y-t-d), now also less than a couple percent from record highs. The Broker/Dealers jumped 2.7%.
Not uncharacteristically, the more dramatic market trading dynamics were visible throughout fixed-income. Curiously, Thursday’s bout of “risk on” (and much stronger-than-expected ADP and ISM Non-Manufacturing reports) finally captured the attention of safe haven bonds. Ten-year Treasury yields surged nine bps to 1.56% – which equated to a painful 1.8% one-day drop in the popular iShares Treasury Bond ETF (TLT). Intraday, TLT was down as much as 2.4%. Bullish pundits were quick to dismiss a single-session yield jump. But of the crowd piling into bond ETFs, how many are unaware of how quickly money can be lost in “safe” bonds?
“Biggest Bond Rout in Years Whiplashes Bulls Who Were Right,” read a Bloomberg article (Liz McCormick) headline. Jumping 9.5 bps to 1.53%, two-year Treasury yields posted their largest one-day jump since February 2015. At one point up 14 bps, two-year Treasury yields were on the cusp of the biggest single-session spike in a decade. Interestingly, the implied yield for December Fed funds futures was little changed for the week at 1.61%.
Investment-grade corporate bonds were under pressure as well. The iShares Investment-Grade Bond ETF (LQD) was down as much as 0.9% intraday before ending Thursday’s session with a loss of 0.7%. While declining almost 1% early in the trading day, the “risk on” backdrop lifted junk bond indices into positive territory by the close.
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