Bond rally nearing an end?

as I recall, junk credit defaults were rising sharply months before equites broke....

The Fed. was unsympathetic and kept jacking up rates during the summer of 87 ....

there seems to no fear of risk nowadays since everyone looks to the Fed to bail out anyone that shows up at the discount window
 
One rather eerie parallel is popularity of derivatives. Remember, in a vastly smaller cash market than today, there was SPX futures and OEX options that contributed to the cascading sell-off. Several brokerage firms had to eat the losses from customer short option positions. Today, in a larger cash market you have options markets that are experiencing a boom equivalent to the late 90s online brokerage boom. Last week, the CBOE saw previous volume records demolished in a very tame sell-off by historical comparison. What happens when you get a 3 sigma event? Are retail investors (who are accounting for record share of volumes) over-extended; more importantly are brokers risk management systems able to cope with massive retail order flow? Look at the GM default swap settlement problem (derivatives bigger than cash) which could be handled in a orderly fashion when a small number of counter-parties are involved. Retail involvement makes risk management much more complicated.

Much as lessons learned from the ‘87 crisis improved FCM stability, we will probably need another partial meltdown to learn important lessons about BD stability.
 
no one that I've followed knows the viabilty of Cayman based hedge funds that are counterparties to all of this derivative wierdness

Cayman based for a reason.......
 
I don't think Bernanke is beyond criticism but this rebute was purely political. It came from Sen. Jim Bunning who had opposed Bernanke's nomination as Fed chief and the effects of Bernanke's comments ended up being very positive for all markets. Bonds started to form a bottom the following day and the Dow was 300 points higher the next week. A few days later, the FOMC statement cancelled all the positive effects the May 1st comments were having on markets.
 
btw, I thought you had to own GM paper before you could enter into a swap agreement, or did I miss the definition of "swap"?

on second thought, I'm afraid of the answer....
 
Quote from daddyeaux:

btw, I thought you had to own GM paper before you could enter into a swap agreement, or did I miss the definition of "swap"?

on second thought, I'm afraid of the answer....
More...

Actually the company was Delphi, not GM - sorry:). But they say if GM did declare bankruptcy there could be a similar situation with not enough actual paper to cover the notional amount of swaps outstanding. Initially Delphi bonds rose in value after the bankruptcy due to the threat of a squeeze. Then they came up with some kind of reference price to settle in cash to avoid paper shortage.

Just goes to show how models can break down when markets get out of control. Similar to option guys back in '87 with short calls that actually INCREASED in value (implied vols>100%) after the crash due to put/call parity [C = S+P].
 
funny how contract law gets rewritten when the fat thumbs can't cover .....

looking at the S&P tonite gives me the sense that a quarter point hike could come at any time
 
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