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Junk Contagion Spreads: Investment Grade Bonds Plunge To 2-Year Lows, 10Y Liquidity Implodes, CLOs Next

Just as we warned, the collapse of the high-yield market has spread contagiously to the investment grade market as selling begets selling and redemptions need to be met from what you can sell, not what you need to sell (but can’t). LQD (the investment-grade bond ETF) is getting hammered today, breaking to its lowest in almost 2 years.

As Europe closed, HYG managed to stabilize but the selling accelerated in LQD (the investment-grade bond ETF)…

Cracking LQD below recent lows to 2-year lows…



Catching down to HYG’s weakness…

And while the storm that is rocking junk, and has now moved on to the investment grade space has not yet roiled government bond prices, it appears to already be doing a number on the liquidity of the most liquid, on the run security, the 10 Year government bonds which as the following chart from Stone McCarthy shows saw the 10-year trading “extremely special”, at -235 basis points, the most negative it has been since the summer of 2014, suggesting that liquidity shortages are now manifesting themselves across all fixed income markets.

Finally, just as with the bundling of subprime mortgage debt, so “bundles” of corporate debt are in trouble this time…

CLOs Hammered as Energy Rout Plays Havoc With Other Debt Markets

The bust in commodities that’s roiling junk bonds is also taking its toll on funds that bundle loans used to finance buyouts.

The riskiest slices of collateralized loan obligations raised after the financial crisis plunged 9 cents on the dollar since September to about 58 cents at the end of last month, down from 84 cents a year ago, according to JPMorgan Chase & Co. Intensifying price declines in recent months have led to one of the “more challenging years in recent memory,” JPMorgan analysts Rishad Ahluwalia and Jacob Kurosaki wrote in a Dec. 11 note to clients.

“The price declines are alarming and worrying,” Ahluwalia, JPMorgan’s head of global CLO research, said in a telephone interview.

Finally, why is the contagion spreading? Because as we noted earlier today, when the dreaded “gates” arrive you sell what you have to: “One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash. Investors end up liquidating the good ones and are forced to keep the bad ones