Mongo Sized Liquidations Plague High Yield — Markets Crack Under Pressure

Zerohedge has a wonderfully written report out on the chicanery that is HYG-JNK in the ETF world of ill repute.

Yesterday, someone sold Mongo-sized quantities of HYG and JNK. Today, both ETFs are again under pressure.

The size of both trades flagged by Tyler is ~$589 million.

“This is a bid-wanted situation in high-yield credit ETFs,” he told Bloomberg: “HYG options are also very active, currently trading 400 percent above their average daily volume, with a 15-to-one put-to-call ratio.” The fund, which has declined for fix straight days, was down another 0.2% on Friday, to its lowest level since February 2016; as part of the selloff, HYG shares hit their steeped discount to the fund’s NAV since early 2018, suggesting that the underlying bonds have even more to drop.

Fund flows, as you can imagine, are supremely negative — with record amounts of selling taking place. The important thing to look out for is January offerings and refinances.

About $52 billion of CLOs are eligible to be reset this January.

Commenting on what may be yet another place where the loan market pipeline will soon be clogged, is “stuffed”, JPMorgan analysts Rishad Ahluwalia and Heather Rochford wrote that “generally speaking, execution of refi/reset/re-issue can be more challenging compared to new-issue in a volatile environment.” Separately, Deutsche Bank reported that the fact that AAA CLO spreads are nearly as wide or wider than the original spread when they were first issued means that there is less of a cost savings for undertaking a refinancing or reset.

In layman’s terms, we could see some credit seizing up, which is another reason to sell stocks. Back in the good old days, recessions were just that. Nowadays, they’re coupled with banking collapses — thanks to decades of low regulation and leverage.