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Old 03-06-2015, 11:49 AM   #1
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Default U.S. Corporate Bond Market Building Stress


One of today’s riskiest investment beliefs is that the world’s central banks will prop up failing economies. Investor confidence in their ultimate success is so high that the government of Italy, whose year-over-year real GDP has been negative since the fourth- quarter of 2011, just sold 10-year bonds at a record-low yield of less than 2%. Yet clear signs of credit stress continue to build throughout global debt markets, despite policies of zero interest rates and massive quantitative easing .

The next two charts show a crucial fact: Liquidity is waning, just as it did prior to the 2007 top. This chart shows a succession of higher highs and higher lows in the junk-to-Treasury spread, which EWFF anticipated last month. In other words, spreads are widening. We have been virtually alone in discussing this “danger ahead” signal.

The divergence relative to the new highs in the Dow has been building since June, when the spread made a low. In 2015, U.S. stocks should catch up to this new trend by declining. The chart shows that the value of the high yield debt of emerging market and energy companies is crashing. It took two years, from mid-2012 to mid-2014, for high yield energy-company bonds to rally 20% and just five months to give it all back.

Bear markets always unfold faster than bull markets. The perceived liquidity in any given market is based on psychology; when it turns from optimism toward increasing pessimism, bids dry up and values collapse. These trends will intensify in 2015.
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