Aug 8. Slight shift in Junk
–Net changes in interest rates were small yesterday, with yields edging lower and a bias towards flattening. The action can be summarized by a couple of trades: Buyer of 60k 0EZ 9812/9800 put spread for 3.25 (settled 3.0 ref 9825.5 in EDZ8). The underlying Dec’18 contract had the largest open interest change on the strip, +21k. This trade caused EDZ8/EDZ9 to close on the low at 19.5 (lowest since the election in November). On the long end, a buyer of 7k TYZ 128c for 21. Settled 23 ref 125-27 in TYZ. This trade marks the return of a program buyer that typically buys 20 delta calls every day. TYZ 128c open interest rose 10k to 24.6k; the position will likely grow to 150k or more. Open interest in TY was +31k.
–Once again, there are warnings about overvalued assets, this time from Gundlach, who says it’s time to move towards the exit. Any warning signs? There were a few headlines saying that CREDIT CARD DEBT IS AT A NEW HIGH! But that’s not really a big deal; it’s just over $1 trillion with GDP of 18.6T, while it first hit that level in 2008, when GDP was $14.7T. Add in student loans at 1.4T and maybe there’s an issue, but maybe not. However, what is perhaps more important is corporate and junk debt. Yesterday we mentioned a Bloomberg story on increased put buying on IG CDX. There’s a NYT article on Tesla tapping the junk bond market for $1.5b as it burns through $1b per quarter. https://www.nytimes.com/2017/08/07/business/dealbook/why-tesla-motors-is-fueling-up-on-debt.html
I also noticed IBM made a new low yesterday (increases debt to buy back shares regularly), and that TEVA was getting crushed (took on heavy debt to fund an acquisition). Probably just isolated cases, however, it’s also the case that junk bond etfs (HYG and JNK) appear to be turning lower after torrid rallies. Possible omen of credit spread widening? By the way, corporate debt issuance is running at a record pace this year….
