$423 Billion Distressed-Debt Deluge in March Doubles Lehman Wave (Hair Of The Dog!)

We are back to the collapse of Lehman Brothers, but this time the virus is not due to the banking system.

(Bloomberg) — Distressed debt supply has surged $234 billion to $559 billion in just the past week, escalating this month’s jump to $423 billion and setting a pace that would nearly double the $215 billion record for a single month set in October 2008. If the total ends the month at these levels, it would be the biggest-ever increase in the par amount of debt in the ICE BofAML US Distressed Index.

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Energy isn’t solely driving the distressed ratio (44.5%) higher anymore as all sectors now have double-digit distressed ratios.

Commercial and industrial (C&I) lending is approaching zero growth as of February.

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Fortunately for America, The Federal Reserve is on call!

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Thanks to Jesse at Jesse’s Cafe Americain!

Liquidity Trap! 3M Treasury Yield At -0.025%

A liquidity trap is a situation in which, “after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rather than holding a debt which yields so low a rate of interest.”

Well, Buckaroos, we are in a liquidity trap with the 3 month Treasury yield at -0.025%.

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A closer look at the T-bill market today.

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So here we sit in a classic liquidity trap!

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Fed Chair Jerome Powell in a liquidity trap!

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Mega thanks to Jesse at Jesse’s Cafe Americain for the jail jpg.

Frankly, I like The Byrds version of Buckaroobetter with the great Clarence White on the Fender Telecaster B-Bender guitar.

Fed Tears Through 2008 Playbook to Counter Economic Hit of Virus

(Bloomberg) — The Federal Reserve has sped through a litany of tools from its playbook during the 2008 financial crisis to support the economy. While they have rolled out several forceful measures, they still have tools and may consider brand new approaches.

Here’s the list of tools the Fed has used in the past two weeks and what could come next:

Cutting Rates to Zero?
Check.
The Fed announced a rare, emergency interest rate cut on March 3 in between its regularly scheduled meetings and then on Sunday, slashed them again to near zero.

Outcome-Based Forward Guidance
Under consideration.

The Federal Open Market Committee’s statement Sunday that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The guidance could be strengthened with language that suggests they will hold rates near zero for a long time, or until the economy achieves a numerical benchmark on inflation or employment. Outcome-based forward guidance was used during the financial crisis and has been discussed by Fed officials in recent months.
The market expects the Fed to maintain rates near zero through the end of 2021.

Quantitative Easing?
Check.
The central bank said in its statement Sunday that “over the coming months” it will buy at least $500 million of U.S. Treasury securities and $200 billion in mortgage-backed securities. That language left the door open to even more purchases, and potentially for a monthly amount as they did in previous rounds of QE.

Yield Curve Control?
Still possible.
This idea was floated by some officials during their debate over strategy and tools over the past several months. The idea is to cap longer-term yields with purchases to reinforce the central bank’s intent to hold rates low for a considerable period.

“The committee would commit to capping rates out the yield curve for a period consistent with its expectation for the duration of the outcome-based forward guidance,” Fed Governor Lael Brainard explained in a Feb. 21 speech. Ten-year Treasury yields jumped to over 1%, from a record low of 0.31% the week before, as the government considers massive stimulus that will force the Treasury to issue more debt.

Negative Interest Rates?
Probably not happening.
Unlike its European counterparts, the Federal Reserve has for the past several years pushed back from negative interest rates saying the tool wouldn’t be well suited to the U.S. economy which has more market-based finance than other countries. “We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Federal Reserve Chairman Jerome Powell said at his Sunday press conference.

Now, they have gone to Plan D!

AAA rated CLOs, CDOs and CMBS are among the collateral types eligible to be pledged by top banks and broker-dealers in order to access the Federal Reserve’s emergency lending program for primary dealers.

The Fed’s so-called Primary Dealer Credit Facility “will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020,” the central bank said in a Tuesday statement announcing the countermeasure to the funding squeeze caused by the coronavirus crisis

It allows for short-term lending and will be available for at least six months at an interest rate equal to the discount rate, which was lowered to 0.25% on Sunday as part of the central bank’s emergency action
Facility resurrects a program the Fed rolled out in the depths of the financial crisis in October 2008

In addition to AAA rated CLOs, other eligible securities that can be used as collateral include IG corporate debt, international agency securities, IG commercial paper, municipal securities, MBS, and equities (with the exception of ETFs, unit investment trusts, mutual funds, rights and warrants)

CLO spreads are blowing out in secondary trading and the acceptance of CLO AAA tranches by the Fed’s facility could provide some relief. The PDCF program may help the market find an acceptable pricing level amid the volatility in secondary pricing, according to market participants

CLO AAA spreads are at post-crisis wides of 180bp for short weighted average life (WAL) and 230bp for long-WAL profiles.

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West Texas Intermediate crude fell another 16%.

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Meanwhile, the Dow is down another 7%.

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The Fed is going to plan D … which is BUY EVERYTHING!!!

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LOIS (LIBOR-Overnight Indexed Swap) Spread Spikes As Fed Adds $4.5 Trillion To Its Balance Sheet

Historically, when the spread between LIBOR and the safer OIS (overnight indexed swap)  widened, it meant that banks were having trouble borrowing and was a warning of danger for the economy. And the LOIS spread is widening!

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The Federal Reserve has reversed course on its balance sheet unwind, but the reversal  started in September of 2019, well ahead of the known corona-virus outbreak in Wuhan China. In fact, The Fed has added $4.5 trillion in recent weeks.

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Apparently at the December 11, 2019, the Fed’s Open Market Committee (FOMC) only saw Fed Funds target rate increases coming.

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Treasury Repo collateral has spiked recently.

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And we are seeing both short and long rates crashing (but the short rates are crashing faster than long rates,

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leading to a steepening of the Treasury yield curve.

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Treasury volatility is on the rise again.

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The coronavirus is NOT a good thing.

Yes, coronavirus fears are sweeping the globe.

But The Fed drives me crazy!

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Another Trading Day, Another Trading Halt (NASDAQ Opens Down 7%, Europe Down 9%, Brazil Down 11.65%)

Another trading day, another trading halt as NASDSAQ opens down 7%.

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Europe is a sea of red as is Brazil.

Here are the circuit breakers thresholds and time durations:

Level 1 halt (7% decline in S&P 500 index)

  • Trading will halt for 15 minutes if drop occurs before 3:25 p.m.
    At or after 3:25 p.m.—trading will continue, unless there is a Level 3 halt.

Level 2 halt (13% decline in S&P 500 index)

  • Trading will halt for 15 minutes if drop occurs before 3:25 p.m.
    At or after 3:25 p.m.—trading will continue, unless there is a Level 3 halt.

Level 3 halt (20% decline in S&P 500 index)

  • At any time during the trading day—trading will halt for the remainder of the trading day.

Trading has resumed in America. As of 10am EST, Europe keeps crashing (down 10%).

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High yield CDX gets crushed!

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Gold is down 3.82%, silver is down 5.40% and Brent crude is down 6.43%.

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UPDATE:

Dow down >2,000. Eurozone stocks crushed like an oversteamed bratwurst!

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Get to the choppa!

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Cedar Fever! Lebanon Will Default On Its Debt For First Time Ever (10Y yield at 30%, 5Y CDS at 18,400)

Uh-oh.

Beirut, Lebanon Lebanese Prime Minister Hassan Diab announced on Saturday that Beirut will not repay a $1.2bn Eurobond due next week and will instead seek to restructure its massive debt as the country’s dollar reserves dwindle amid an acute financial crisis.

In a televised address to the nation, Diab said the “difficult decision” to default for the first time in Lebanon’s history had been made in order to “secure the basic needs for people”.

Lebanon is in the throes of an economic meltdown rooted in corruption, government mismanagement, a decrepit power sector that bleeds billions from state coffers and the civil war next door in Syria.

As of Friday, the 10-year yield on Lebanon’s sovereign debt soared to 30%. And 5Y CDS soared to 18,400.

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On top of the Lebanon freezes their Eurobond Payment.

(Bloomberg) — Lebanon is about to enter the crucial first phase of talks aimed at renegotiating its $30 billion in Eurobonds after saying at the weekend it won’t pay dollar debt coming due on Monday.

The government’s declaration on Saturday that it won’t repay the $1.2 billion Eurobond puts the country on course for the first default in its history as it copes with dwindling foreign-currency reserves and inflation running in double digits. Talks will be complicated by high foreign ownership of some of the bonds and political divisions that have left the economy on the ropes.

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Is this what Texans call “Cedar Fever”?

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Credit Default Swap Indices Get Hammered By Coronavirus

Its the same all over the world. Credit Default Swap Index (CDX) across Markit indices are all declining (except for Emerging Markets).

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Unfortunately, the S&P 500 index and CDX are behaving like a grizzly bear.

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The CDX IG curve is updward sloping while the CDX HY curve is flattish.

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Markets are hoping for more sugar from their sugar babe, Jerome Powell.

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