Remember, Remember, The 5th of November

Gunpowder, Treason and Plot
I see no reason why gun powder, treason,
Should ever be forgot

It’s Guy Fawkes Day and Twitter will close its IPO at a 25% premium.

I think necessary precautions should be taken after reading that Bill Gross’s Pimco Total Return Fund (Bonds) has been dethroned as the largest open-end mutual fund by Vanguard’s Total Stock Market Index Fund.

Not only is Pimco suffering, JPM’s Core Bond Fund saw its biggest weekly outflow from its US investment grade debt fund since June.

For all our cries of a stock market bubble, we dare not cast our eyes on the bond markets.All except for Mauldin, Faber and the Fed’s James Bullard who came out last night on CNBC with the headline, “Risk of bond market bubble: Bullard”

Mauldin said this in his latest newsletter, Thoughts from the Frontline – Bubbles, Bubbles Everywhere, “One area that stands out as particularly bubbly is the corporate bond market. Investors are barely being compensated for the risks they’re taking. In 2007, a three-month certificate of deposit yielded more than junk bonds do today.”

“One day, all the debt will come due, and it will end with a bang. “We are building a bigger time bomb” with $500 billion a year in debt coming due between 2018 and 2020, at a point in time when the bonds might not be able to be refinanced as easily as they are today”

In his bubble anatomy, there are 5 stages – Displacement (change i.e. QE, LTRO, Abenomics), Boom (early adopters), Euphoria (where everyone becomes aware that they can make money by buying stocks in a certain industry or buying houses in certain places), Crisis (when someone starts selling) and Revulsion.


1. Fund redemptions out of Pimco and JPM has a chain effect, trimming exposures and counter exposures that will filter through to the comparables across the markets and geography.

2. Excessive government interventions in the marketplace. ”     Nov. 5 (Bloomberg) — Mizuho Securities Co. said Bank of Japan dominance has killed the nation’s sovereign bond market, leaving it unable to reflect either the success of stimulus
policies or fiscal risks.
Monthly trading of Japanese government bonds among the biggest holders including banks and insurers shrank to 37.9 trillion yen ($385 billion) last quarter, the least on record going back to 2004, according to Japan Securities Dealers Association data.”

3. Inequitable pricing as junk finds wings.
”     Nov. 5 (Bloomberg) — Corporate bond trading volumes are surging the most since 2008 as buyers wager they’ll be able to reap more gains before the Federal Reserve starts tapering stimulus that’s fueled a record rally in the debt.
Average daily trading of investment- and speculative-grade debt surged to $19.5 billion in October, up 18 percent from the previous 90-day period, according to Trace, the bond reporting system of the Financial Industry Regulatory Authority. The Bloomberg USD High Yield Corporate Bond Index gained 2.3 percent
last month, the most since January 2012.”

Bonds Are Not Safe

We feel solidarity when we buy bonds – with the arranging banks and our bankers and all the other bond holders. Fixed income is safe unlike equities which tend to bubble alot more. We read about stock market crashes but little about bond market crashes because the central banks have always stepped up, in the past years, to the rescue even in the cases of Cyprus and Greece and all the Chinese solar companies whose debt were assumed by the state.

I have seen bond markets crash before and there was a time when I ran out of lines to buy even HDB bonds because I was sold several hundred millions. As for sub debts and perps, there was no question.

Ford and GMAC bonds were trading less than half their notional values back in 2003-2004. Asia Pulp and Paper in 2001 decimated to a handful of cents like Greek bonds, which was more recent.

Why do people have to sell ?

Because of the domino contagion effect. When someone hits, the market price shifts and other people’s margin’s calls will be triggered. It doesn’t even have to be because of the bond per se, but it could be another trade in the portfolio gone wrong that caused the bond position to be liquidated, affecting everything else, all the same.

It is coming to the year end and banking books certainly do not want to hold too much of Pimco’s stuff for fear of balance sheet constraints. Lets be mindful, starting today, the 5th of November and the Twitter IPO day.

Leaving with a great quote I read from one of Doug Kass’s tweets, “A bubble is a bull market in which you dont have a position”.

Happy Bonfire Night !