Strange things are happening in financial markets

These are interesting times, especially for the financial markets. One month a rate hike is bad news and the next month a rate hike is good news. But beneath the surface, strange things are happening. Certain conditions take longer than average or never existed before.

Monetary intervention from central banks all around the world created rare events on the financial markets. Bloomberg has some bizarre examples.

Negative swap spreads

While the term may mean little to your average retail investor, swap spreads have become the talk of financial markets in recent weeks as they plumb historic lows and seemingly defy market logic.

At issue is the fact that swap rates—or rates charged for interest rate swaps—have dipped below yields on equivalent U.S. Treasuries, indicating that investors are charging less to deal with banks and corporations than with the U.S. government. Such a thing should never happen, as U.S. Treasuries theoretically represent the “risk-free” rate while swap rates are imbued with significant counterparty risk that should demand a premium.

Corporate bond inventories below zero

Analysts at Goldman Sachs made waves this week when they highlighted the fact that inventories of some corporate bonds held by big dealer-banks had gone negative for the first time since the Federal Reserve began collecting such data. That means big banks are now net short corporate bonds with a maturity greater than 12 months equivalent to $1.4 billion, bucking the longer-term trend of net positive positions.

Charles Himmelberg, Goldman analyst:

“The trend reflects the rising cost of holding corporate-bond positions. This looks increasingly like a growing headwind that will be with us for some time.”

Market moves that aren’t supposed to happen keep happening

 

Much of Wall Street runs on mathematical models that abhor statistical anomalies. Unfortunately for the Street, such statistical anomalies have happened more often, with short-term moves in many assets exceeding historical norms.

The number of assets registering large moves—four or more standard deviations away from their normal trading range—has been increasing. Such moves would normally be expected to happen once every 62 years.

Perhaps the best-known example is Oct. 15, 2014, when the yield on the 10-year U.S. Treasury briefly plunged 33 basis points—a seven standard-deviation move that should happen once every 1.6 billion years, based on a normal distribution of probabilities.