It's trash day put your junk debt on the curb

So at 6 AM I looked at the Dow futures and saw it was up 80 points, with S&P futures up 12 points and thought either “market participants” had contained the junk bond contagion or the New York Fed was trading in the futures to bolster the market on the back of not being able to contain the junk contagion.

This is how markets work nowadays as I wrote over the weekend.

Then by 6:20 AM Monday both futures gains were cut in half and I assumed my latter thesis was the correct one. At 6:30 AM the futures went negative confirming the thesis.

The contagion aspect is that plenty of vanilla mutual funds — used by the markets for parking money short-term — are in the junk market to grab some yield not found in bonds or stocks to balance their portfolios’ returns. Well these funds need to sell what they can in order to redeem clients cash.

The junk debt is not finding buyers at market price. Some trades are 20 percent lower than Friday’s price, which is off 25 percent from earlier in the month. This is known as the falling knife. Don’t try to catch it, let it hit bottom and then pick it up.

Like retailers this Christmas season, today stocks and government bonds will be on sale with prices probably off 3 percent to 5 percent market wide.

This is the liquidity squeeze Carl Icahn has been talking about with junk bond ETFs, which let players big and small into the junk yard.

Now those ETFs are persona non grata on debt trading desks, despite what BlackRock CEO Larry Fink has to say.

Fink and his firm are the largest issuers of junk ETFs. Fink’s hubris over the weekend that all junk ETF trades were executed is laughable. Yes BlackRock is backing trades for now, but today or certainly this week could be the breaking point for the largest asset management firm in the world being the buyer of last resort, even if the Fed backstops them.

So hold on to your ass today, it’s going to be a bumpy ride.

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