The US high-yield bond market is currently facing its swiftest sell-off since March, triggering concerns reminiscent of worries about a banking-market collapse. Spreads in this market have widened by almost half a percentage point since December 28, marking the fastest pace of widening since March 16. This sudden development has raised eyebrows, signaling potential turbulence in the financial landscape.
A notable factor contributing to the market unease is the rapid depletion of the Reverse Repo (“RRP”) account. This account has experienced a staggering decline of around $50 billion in a single day. If this trend persists, the RRP, initially established as a response to the economic challenges of 2020-21, could be depleted by the end of January 2024. This raises questions about the implications for the market, given the RRP’s historical role as a source of liquidity.
Moreover, the recent observations in the labor market are amplifying economic concerns. Job growth outside sectors like hospitality, healthcare, and government has decelerated significantly, dropping from 400,000 new jobs per month at the beginning of 2022 to a mere 2,000 per month in the last six months, according to Goldman Sachs. This slowdown in job creation could have wider-reaching implications for the overall economic landscape.
In addition to domestic challenges, there are indications of economic struggles in the Euro zone, where business activity has contracted in December, pointing to the possibility of a recession. The confluence of these factors, along with heightened volatility in short-term funding markets, presents a complex scenario. The gyrations in repo rates and fluctuations in markets collateralized by Treasuries add an additional layer of uncertainty. The potential impact on monetary policy and broader economic stability warrants close attention as these developments unfold.
US high-yield bonds have sold off at the fastest pace since March, when traders were worried about a banking-market collapse. Spreads have widened by nearly a half a percentage point since Dec. 28, the fastest pace since March 16. pic.twitter.com/0baO8qXjRI
— Lisa Abramowicz (@lisaabramowicz1) January 5, 2024
Wow… the Reverse Repo ("RRP") account fell another ~$50bn… JUST TODAY. At this rate, it will be gone by the end of Jan. 2024. The RRP is de facto QE-infinity $ printed during 2020-21 that was sitting dormant. It's now being used to buy up @SecYellen's bonds (this is QE). pic.twitter.com/7b4RPbGOQU
— Gordon Johnson (@GordonJohnson19) January 4, 2024
People finally noticing the waiter/bartender/nanny state labor market:
"Outside of hospitality, healthcare, and government, job growth has slowed from 400k per month at the start of 2022 to just 2k per month in the last six months." – Goldman
— zerohedge (@zerohedge) January 4, 2024
Euro zone business activity shrank again in Dec, pointing to recession
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