A Message from Lord Vader

John Mauldin

Jun 25, 2013


As long-time readers know, I have a very eclectic group of friends and associates. Colorful, opinionated, generally both fun and funny, they make for interesting times and discussions wherever I go. I am not certain why they associate with such a mild-mannered, soft-spoken, Muddle-Through Texan like me, but most agree that I am at least good for comic relief. Next week I will be in the midst of some unabashed bulls, but today I offer up for your reading pleasure a note from a friend who is on the Dark Side of the fence, though he is hardly what you could call a conventional bear. He is Rich Yamarone, Chief Economist for Bloomberg.

Lately, Rich has become known in the trade as Lord Vader for his always enthusiastic but distinctly gloomy views, and he has assumed the persona with some gusto. You are about to be treated to a missive he writes from the Dark Side, where he is spending the summer, finding many things to worry about. And he backs up his concerns with a solid list of facts and data, as well as some of the findings from the Orange Book that he writes each month. The Orange Book is a summation of the economic notes from Rich's conference calls with the CEOs and CFOs of the largest businesses in the S&P 500. It has become de rigeur reading for those looking for signals from the business community.

And what those CEOs tell us is that the economy is soft – which, given that GDP growth is likely to be less than 2% for the year, is confirmation of what we're hearing from other directions. Herein we learn that things might get bumpy on the ride ahead, but at least we are entertained by Mr. Yamarone even as we are forewarned.

Rich is part of dynamic group of economists who contribute to the Bloomberg Brief: Economics newsletter. Rich, along with my friend Tom Keene and five others, distills the day’s must-know information to about ten pages, every day. And Rich's Orange Book is part of the deal. Check it out here.

And speaking of bumpy, I am waiting to get on a plane to Cyprus, which has experienced a rough ride of its own of late. I will report this weekend on what I find. On Thursday I will catch an irrationally early flight to Split, Croatia, where I will be gathered by the notoriously colorful Irish economist David McWilliams, who will regale me and perhaps even alarm me with his tales (such wonderful stories they are!). But not before I wander around Split for a bit and make sure my weekly letter to you gets writ.

And now it is time to hit the send button, as Air Cyprus will not hold the plane for either lords or Texans. Have a great week.

John Mauldin, Editor
Outside the Box



A Message from Lord Vader


“There is no dark side of the moon really. Matter of fact, it’s all dark.”
     Pink Floyd



A recent gut feeling about a global unraveling has forced the Prince of Darkness to issue the following statement regarding the economic climate (as well as provide an open invite to the annual Dark Side summer soiree): Emerging markets are in turmoil, Europe is spiraling deeper into recession and finance ministers in the region are scrambling to fix the seemingly never ending banking crisis.

Turkey is the new hotbed of civil unrest, and central banks and sovereign nations are providing extreme monetary policy accommodation and engaging in currency wars to maintain some sense of stabilization. The World Bank reduced its global economic forecast to 2.2 percent in 2013lower than the 2.3 percent performance in 2012.

It was just a matter of time before the conditions started to break down. If you see a 500 lb. man eating a donut and smoking a cigarette, you needn’t be a genius to know the situation isn’t going to end well. Similarly, blistering gains in the equity indexes to record highs amid a sluggish economic performance are simply unsustainable. Look at the bifurcation between the CRB index and the S&P 500; that solid relationship between the market and economy broke down in December of last year, and it now looks as if the S&P will rejoin the commodity benchmark in its tailspin.

GDP advanced by a seasonally adjusted annual rate of 2.4 percent in the first quarter, resulting in a 1.8 percent increase over the previous year – which is usually a recession indicator. For now it’s likely that the economy continues to plod along at this subdued level until one of the many obstacles send it south.
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We recently saw of a number of possible signals of a downturn.

The ISM's PMI fell to 49 in May from 50.7 in April, the first sub-50 reading in the barometer since November (49.9) and the lowest level since Jun 2009 (45.8) when the U.S. economy was emerging from depression. Along the same lines, the key subcomponents of New Orders and Production fell to 48.8 and 48.6 respectivelyindicating a contraction in business conditions. This slump doesn't appear to be solely an American condition.

The difference between the New Orders Index (a proxy for future demand) and the level of existing inventories (expectations by businesses of future demand) was -0.2 in May. Historically a negative reading has been a recession indicator. This isn't foolproof – there have been several negative postings with a downturn surfacing – but there have been six negative readings since the end of the 2007-2009 depression, which supports a somewhat tepid situation.

The other ISM indicator is the Price Index, which slipped below 50 to 49.5 in May. Below-50 readings are always experienced during recessions. The inability of businesses to raise prices in a challenging economic environment, in combination with a sub-50 reading in the headline PMI and a negative New Orders less Inventories index suggests a notable curtailment in economic growth.

Industrial production has peaked (8.5 percent) in mid-2010 to 1.95 percent today (another indicator that has fallen below that magical 2.0 percent recession level), and manufacturers are slashing jobs again. The regional Fed manufacturing indices are all lingering in crummy territory at best.

Electricity output has fallen in each of the last five weeks (on a year-over-year basis), and shipments of nondefense capital goods excluding aircraft plunged 1.5 percent in April – a messy beginning of the second quarter.

The average length of the last ten expansions is 60.5 months, and we are currently 47 months into the most recent recovery. It isn't inconceivable that the economy contracts at this point, especially since it has been operating at a pace that has historically suggested recession.
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If the global equity market sell-off is not a “Sell in Mayevent, but rather the beginning of the great unwinding then the economy, already skating on thin ice, is even more susceptible to a downturn.

There is something to consider with respect to the sluggish second quarter start: data revisions have an incredible ability to change the economic landscape and the determination of business cycle strengths and turning points. In 2008, the fourth quarter GDP was initial reported to have declined by 3.8 percentnine revisions later the actual level stands at -8.9 percent. [Hat tip to my friends at Chilton Capital for bringing it to my attention.]

On July 31, the Bureau of Economic Analysis will revise the National Income Product Accounts (including the GDP report). What happenspure speculation, but not entirely outrageous if the final quarter 2012 GDP increase is downwardly revised from its current 0.4 gain to a 0.5 percent decline. And the first quarter 2013 increase of 2.4 is shaved a few basis points to a 1.8 percent increase, and the current quarter comes in negative?

Will the chatter pick up about recession? Will a recession be declared? Will those folks at the ECRI be heralded as heroes? Will the Street flock to the Dark Side, and will everyone will want in on our glorious Dark Side picnic. Do we have enough chairs? Stay tuned, its less than two months away

According to (82) economists polled by Bloomberg, U.S. GDP is expected to increase 1.9% in 2013, following a 2.2% gain in 2012. This is extremely weak by historical standards, and with the exception of one event, has resulted in recession every time since 1948.

This said, we are anticipating the addition of several Street economists to come over and join us here on the Dark Side as well as the annual picnic – we are fully prepared as we asked Beelzebub's Catering and Party Tent Rentals to provide us with a few hundred extra chairs and tables. (Thanks guys.)

This year’s party might not be as exciting or entertaining as in previous confabs. Just as Fed Chairman Ben Bernanke will not be attending the annual central bank conference in Jackson Hole, Wyoming, we are afraid that a long-time Dark Side headliner (and a dear friend) Dave Rosenberg of Gluskin-Sheff, might not be partying with our Doom and Gloom set. This is a mighty blow – you’ll remember the 2004 and 2005 soirees when Mr. Rosenberg was undoubtedly the life of the Dark Side parties, forewarning all that would listen of the pending housing crisis and subsequent economic doom.

To date, the labor market recovery has been unimpressive. The number of Americans on nonfarm payrolls totaled 135 million in April, the same level as in late 2005. On this basis one can claim the U.S. has "turned Japanese" with a near lost decade of job creation. We should expect results that are similarly poor as in Japan in coming decades: we use the same policy prescription for the same ailment, why wouldn't we have the same result? If you wrap avocado, cucumber, and rice in Nori with sesame seeds, it's a California roll. Why would you think it's something else? [For the record, there is no sushi in the Dark Side.]

It looks like 96,300 of the 175,000 new nonfarm jobs created last month were in very low wage industries (retail, 27,000), temporary, (25,600), leisure and hospitality (43,000). The industries with the two lowest hourly wages are leisure and hospitality ($11.76) and retail ($13.92). It isn’t clear how the world’s largest economy gets back on its feet with so many receiving such low incomes.

In the Dark Side wages don't matter, everything here is free – it's not that dark! The single greatest hurdle for the recognized U.S. economy however, is flat-to-declining wages. To some this may sound a tad like a broken record [Apparently vinyl records are more popular than cds right now see: http://bit.ly/1aWrtW3 ] but the only thing that matters to the economic recovery is incomes.



Real disposable personal incomes – the amount that consumers have to spend once adjusted for inflation and taxesincreased 0.1 percent in April, a mere 1.0 percent higher than year ago levels.

Similarly, the amount of spending that Americans facilitated with that lowly income inched up 0.1 percent, or 2.1 percent from April 2012. Real disposable personal incomes had a history of advancing at 3.75 percent, which would boost spending by a similarly robust pace. As long as income growth is staid as it is, the economy will continue to spin its wheels in a sideways movement, and subsequently keep a lid on job creation.

Grab some food stamps…they don’t cost nothing. Some things don’t need to be examined to know what kind of an effect they will have on consumer psyches, spending habits, and ultimately aggregate demand. According to the USDA, there are more than 47 million Americans on the Supplemental Nutrition Assistance Program, more commonly known as food stamps. Since the end of the depression in June 2009, food stamp assistance has accelerated by 30.8 percent, dwarfing job creation of 3.8 percent during the same period.

This said, it should come as no surprise grocery and health and wellness in aggregate make up about 66 percent of Wal-Mart’s revenues. More stores are adjusting space for the inclusion of groceries.



Anecdotes from the Bloomberg Orange Bookadmittedly a far too bright colour for those residing here in the place of tormentpoint to a number of headwinds.


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The Bloomberg Orange Book Sentiment Index has been below 50 (a reading of contraction) for eighteen consecutive weeks. Comments continue to paint a picture of souring business conditions.

Consumer companies complain:

Church & Dwight: “I have been a long-term pessimist about the business environment. The latest forecast of weak GDP growth, continuing high unemployment and weak same-sale stores (sic) [same-store sales] (10:30) growth by our major retailers provides little hope for near-term improvement in the U.S. economy.” “2013 is shaping up to be another very challenging year due to the weak consumer demand.”

Denny’s: “We faced significant headwinds in this quarter, as we lapped our strongest quarter of last year. And our customers felt the impact of higher payroll taxes, gas prices and delayed income tax refunds. As a result, we ended up with our first quarter of negative system-wide same-store sales in almost two years.”

Shoe Carnival: “The government’s delay to act on tax policy and their subsequent decision to raise payroll tax withholding rates had an immediate impact on our consumer. The decision the IRS made to delay accepting tax returns until January 30 also had an immediate and calculable impact on our sales results for the last 10 days of the quarter.”

Express Inc.: “At the same time, traffic is down noticeably compared to last year. Consumers appeared cautious due to the macroeconomic environment and uncertainty around budget cuts and also the impact of higher payroll taxes.”

Kona Grill: “During the quarter, the restaurant industry in general experienced a pullback in consumer spending due to the payroll tax increase, delays in income tax reform, and spiking gas prices, which impacted guest traffic and we were no exception.”

The catatonic state of affairs in Washington, DC is really upending many companieskind of shocking that in the aftermath of depression, fiscal policy is so incredibly restrictive.

Sequestration is on the minds of many companies, and it is not limited to the aerospace and defense industry:

Kelly Services: “We expect the current pace of growth will continue as the U.S. labor market remains fragile and unpredictable with no clear signs of momentum. Add to that there is ongoing uncertainty about the effects of sequestration and rising anxieties surrounding the impending Affordable Care Act, which is one of the most significant issues facing our industry today.”

Armstrong Worldwide: “On the commercial front, in the U.S., we anticípate a continuation of flat to slightly down commercial volumes, with ongoing weakness in education and, to a lesser extent, healthcare.”

Hertz Global Holdings: “In April, we experienced some softness in both the car and equipment rental businesses in the U.S. due to the holiday shift and the initial impact of the sequester. Volumes in our government businesses were down double digits this month, and our commercial accounts with exposure to government customers also cut back on travel.”

UPS: “Although the U.S. economy is poised for growth, it is being restrained somewhat by the tax increases and sequestration implemented during the first quarter. This will be a drag on 2013 GDP expansion with current expectations for about 2% growth.”

Lockheed Martin: “I think as we looked forward for the next three quarters, we do expect to see some pressures from sequestration. They’ve not played out at this point, but we do expect them to happen in the next three quarters.”

Internationally, Bloomberg Orange Book anecdotes have highlighted great concern:

Sealed Air: “As a Frenchman, I can tell you I’m very concerned about the French economy. It’s been moving towards Spain and Italy instead of moving towards Germany. And it shows in our equipment business, equipment and tools business.”

Air Products & Chemicals: “In North America we experienced modest growth; Europe sunk deeper into recession, with Southern Europe remaining particularly weak while the Northern Continent and Central Europe worsened; and in Asia there was a slower-than-expected ramp-up after the Lunar New Year holiday.”

Cooper Tire & Rubber: “China’s economy continues to grow at a slower pace than recent historical rates and Europe’s economy remains stalled. Combined, all of these challenges resulted in Cooper’s shipping volumes being 8% lower than the prior-year first quarter…”

Avis Budget: “Interestingly the markets that were weak last year Italy and Spain seemed to have stabilized thus far in 2013, while France and the UK continued to show some signs of weakness. Germany, which was the lone moderately strong performer last year, has softened this year in line with its softening economy.”

McDonald’s: “Japan’s performance for the quarter was negatively impacted by the difficult economy, a declining IEO industry, and ongoing consumer sensitivity to prices and promotions. Japan continues to evaluate and adjust its plans to complement existing value initiatives with new product news that drives long-term profitable sales and guest counts.”

Central banks all over the world are singing the song of unconventional monetary policy. Now we are all lead to believe that the Bank of Japan’s most recent announcement to adopt a $1.4 trillion quantitative easing program will be the magical elixir to its multi-decade ailments. This seems a little doubtful; as Tanya Tucker sang, "It's a little too late to do the right thing now."

The incomes and wage channel hold the answers to countless economic issues. Other than the obvious influences on confidence, spending, corporate profits, and hiring, there is the impact on policy prescriptions. As long as there is disinflation or deflation in average hourly earnings, the Fed should be expected to its foot on the accelerator, and refrain from tapering in the near term.

Many pundits are pointing to geopolitical uprisings as cause for concern to the U.S. economic recovery efforts. Economically speaking, the American consumer – the ultimate driver of aggregate demand – cares little about the goings on overseas. You’ll never overhear Mom pushing junior in a Wal-Mart or Target saying, “We’re not buying any toys today, there’s civil unrest in Turkey.”

Investors should expect any meaningful impact from the strife in Cyprus, Syria, or any other nation that is not economically influential.

Our friend Lucifer of Lucifer's Econometric Forecasting & Astrology informed us that this year might not be something to get excited over. Earlier this year, the Chinese zodiac welcomed the Year of the Snake. Previous "snake years” haven’t been kind to the U.S. economy; of the last ten (1893, 1905, 1917, 1929, 1941, 1953, 1965, 1977, 1989, and 2001), the U.S economy had experienced two recessions (1953, 2001) and two depressions (1893, 1929). Other years experienced similarly profound bouts of calamity, i.e.; in 1917 the U.S. entered WW-I, and in 1941 entered WW-II. Snakes are seldom overlooked and have a tendency to strike sharply when ignored.

So while you are making your plans for this summer and the early fall, remember: here in the Dark Side there’s an open invite for the excellent assortment of dark beers for your consumption – they are warm. After all, this is the Dark Side. There's a wonderful dark chocolate cake for dessert, and Marilyn Manson is scheduled to be the warm-up band for Alice Cooper on Laborless Day, who will be performing at 5:00 pm in the Satan's Den. Thanks again for considering, your table is ready.

Lord Vader

Richard Yamarone is an economist who focuses on monetary and fiscal policy, economic indicators, fixed-income, commodities, and general macroeconomic conditions for Bloomberg Brief: Economics, a daily newsletter that features analysis, data and news on the forces shaping the global economy. Mr. Yamarone and the Bloomberg Brief economics team provide in-depth analysis of macroeconomic data, policy, and trends and how they will impact financial markets.


Another shameful day for Europe as EMU creditor states betray South

So much for the denials. The Cyprus "template" for banking crises is to be eurozone policy for other countries after all.

By Ambrose Evans-Pritchard

6:45PM BST 21 Jun 2013
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Lego shark chomps down on a Lego figure holding a Greek flag as other figures holding an Italian (L), Portuguese (C) and Spanish flag look on over a sea of Euro coins
The creditor states of the North are still calling all the shots, and presumption remains that the countries in trouble are victims of their owns failures, fecklessness and folly Photo: Getty Images

 

The deal reached by EMU finance ministers on the use of the bail-out fund (ESM) to recapitalise distressed Banks makes clear who will in fact suffer the real losses: first shareholders, then bondholders and then deposit holders above €100,000. They stand to lose almost everything, as we saw with Laiki in Cyprus.
 
Officials from the European Central Bank and the European Commission warned during the Cyprus crisis that it would be dangerous to set such a precedent, fearing contagion. The Portuguese were openly alarmed.
 
So has that risk of contagion since dissipated? One should have thought quite the opposite, given the yield spike in Portugal, Spain, Italy et al since the Bernanke Fed dropped its taper bomb this week.
 
Furthermore, as Yanis Varoufakis points here, the deal resiles from the solemn agreement by EU leaders in June 2012 to break vicious circle between crippled banking systems and crippled sovereign states, each dragging the other down.

The states that are already in trouble will have to carry most of the burden of recapitalising banks, pushing them over the edge into actual insolvency. They will have to come up with the money needed to raise capital ratios to 4.5pc of assets.

Then come the private haircuts, which of course risk devastation for the host country, and the collapse of investor confidence. Only then does Europe step in to share part - not all - of any further recap needs.

The original promise of an ESM blanket to cover "legacy assets" has come to almost nothing. The vassal states may possibly get some relief later on the past losses from the EMU credit bubble, but only as a reward for good behaviour and on a case by case basis.

"Legacy losses will be used as a disciplinary device: Greece, Spain and Ireland will now have to tussle, beg and plead for debt relief regarding the funds already borrowed from the EFSF-ESM for their banks," said Dr Varoufakis.

"As the grand total for all bank recapitalisations, past and future, is to be limited to the puny sum of €60bn, Europe’s peripheral nations can only at best receive a tiny amount of debt relief; enough to ensure that Ireland, Greece and Spain are competing against one another as to which proud nation will be a bettermodel prisoner than the rest."

Indeed, it is an abject spectacle. Dr Varoufakis rightly calls it a "a truly shameful day for Europe".
The creditor states of the North are still calling all the shots, and presumption remains that the countries in trouble are victims of their owns failures, fecklessness and folly.

There is no recognition that this disaster was a joint venture, caused by the dysfunctional structure of monetary union; nor that Northern creditors and their banks share half the blame for flooding the South with cheap credit; nor that the ECB played a huge part in stoking unstable credit bubbles in Club Med and Ireland by gunning M3 money supply at double-digit rates to help nurse Germany through its slump. Nor is there even a sensible analysis of what is needed to solve the crisis.

One can understand why Germany, Holland, Finland and Austria do not wish to accept any mutualisation of EMU debt, or admit to their own taxpayers that the euro project costs real money.

But what sticks in the craw is the relentless propaganda by EU leaders that they will stand shoulder to shoulder in solidarity with fellow members of EMU, and that they will do whatever it takes to uphold a project upon which the peace of Europe allegedly depends. Quite obviously they will do no such thing.

What sticks, too, is the oft-repeated claim that Anglo-Saxon outsiders failed to understand the degree of pan-European political will behind the EMU project.

This cliche is the opposite of the truth. Anglo-Saxon investors believed so gullibly in the total sanctity of EMU that they were willing to buy Greek 10-year bonds for a wafer-thin margin of just 26 basis points (bps) over Bunds (and Spanish debt for just extra 4bps). They believed the dream, too.

The reason why the EMU crisis metastasized - when debt levels were lower than in the US or Japan - was the horrible discovery that Germany might not stand behind the project after all, and certainly would not stand behind Greece. Those who stayed to the end lost 75pc (de facto) in Greek haircuts.

As for Greece, it is getting uglier by the day - as Open Europe puts it here.

The Democratic Left has pulled out of the coalition in protest over the shutdown of the ERT public broadcaster, reducing the Samaras majority to three seats. The privatisation programme is ruins. The National Healthcare Provision has a funding gap of €1bn. Not nearly enough public employees have been sacked to meet the Troika demands.

And now the IMF is threatening to pull out altogether unless the eurozone comes up with the €3bn to €4bn needed by next month needed to comply with bail-out terms.

It may not really matter that Greek bond yields are back above 11pc, but it certainly does matter that Spanish yields are once again nearing 5pc. Given that Spain is in deflation (once you strip out tax levies), and given that its nominal GDP contracted by 1.8pc last year, and will contract by as much this year, you can see the lethal compound effects on the debt trajectory. Ditto for Italy.

"The yield increase in the peripherals is becoming alarming," said Peter Schaffrik from the Royal Bank of Canada.

Indeed so. Nothing has been solved. The eurozone's creditor powers are playing a cruel game, doing just enough to keep this wretched entreprise alive and to protect their own commercial interests, but not enough to solve the crisis. The torture is endless. The cynicism plain to see. And the willingness of victim states to accept their plight so lamely is simply staggering.


CREDIT MARKETS

Updated June 24, 2013, 9:05 p.m. ET

Falling Debt Prices Roil Market

Fielding Calls From a Pushy Bond Dealer as Buyers Vanish

By KATY BURNE, AL YOON and KELLY NOLAN

 

The rout in the credit markets has gotten so messy some investors are having trouble finding people willing to buy what they are selling.
 
From municipal bonds to corporate debt to mortgage-backed securities, prices fell sharply again Monday, extending big declines that began last week.
 
 
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The yield on the 10-year Treasury TWE.AU -1.86% note rose to 2.546%, and yields on highly rated municipal bonds maturing in 10 years rose 0.17 percentage point to 2.8%, according to Thomson Reuters Municipal Market Data. Below-investment-grade bonds issued by Tenet Healthcare Corp. THC +2.39% traded at a yield of 7.730% and a price of 95 cents on the dollar, down from 104.375 cents and a yield of 5.939% as recently as June 18. 

The selling, which began in May, kicked into high gear last Wednesday, when Federal Reserve Chairman Ben Bernanke improved his economic outlook and accelerated the timetable for considering tapering the Fed's bond buying. The fast-moving price declines have meant liquidity is drying up in many corners of the bond markets. 

Pressure is mounting on fund managers as investors have pulled near-record amounts of cash from the bond markets in recent weeks. Trading desks at Wall Street firms are increasingly worried about the demand for bonds, or liquidity, they can expect from investors, and they don't want assets that could stick them with losses if prices fall further. Many investors and banks close their books for the second quarter of 2013 at the end of the week.

Richard Prager, global head of trading and liquidity strategies at $3.9 trillion asset manager BlackRock Inc., BLK +2.24% said the firm recently reduced its expectations of the dollar amount of the bonds it could trade by 25% compared with what it would expect is possible in more routine conditions. "Credit markets are not broken," he said, even though the gap between the price where investors will buy and where others will sell is getting wider. "We are still concerned about liquidity." 

The credit markets aren't in the deep freeze they were in 2008, when many investors had difficulties selling a range of assets, and Wall Street firms were forced to sharply dial back the risk they took. Since the financial crisis, most banks have used much less borrowed money to operate their businesses, and investors have bought far fewer exotic and complex securities.
But dealers already stock only about one-quarter of the dollar amount of corporate bonds on their inventory shelves that they did before the financial crisis, according to data from the Federal Reserve Bank of New York. And investors have been preparing for lower-octane trading since new regulations emerged in 2010 restricting banks that make bets with their own money 

"We're coming from an environment where liquidity was already difficult," said Andrew O'Brien, partner and portfolio manager at Lord, Abbett & Co., whose group manages $45 billion in bonds. He said that, unless there is a buyer already lined up, it is difficult to trade anything 

Mr. O'Brien said his firm has been keeping more cash and U.S. Treasurys on hand. "This is something we've been worried about for some time," he said.  

To a degree that has been rare since the financial crisis, many markets are falling simultaneously, adjusting to a future with potentially less central-bank stimulus. Also weighing on markets are concerns about growth in China, whose economic expansion has been a boost to U.S. stability. 

Pressure on Wall Street trading desks crystallized Monday for Christopher Sullivan, chief investment officer at the United Nations Federal Credit Unión. He said he received three emails and two phone calls that day from a sales contact at a Wall Street firm pleading with him to buy mortgage-backed securities. Mr. Sullivan said "no" each time. The last call included an apology from the contact, saying his trading desk demanded he push the bonds. 

The financial landscape looks quite different from six weeks ago. Then, some Wall Street firms were gobbling up risky mortgage bonds backed by subprime loans. Lloyds Banking Group LLOY.LN +1.39% PLC sold $8.7 billion of such bonds in May to Wall Street firms eager to capitalize on prices for similar debt that had been rising over the past 18 months. 

Now, trading is a slog in the market for mortgage debt not backed by government agencies, say investors and traders. Only 69.5% of such bonds put up for sale through lists circulated through and by Wall Street dealers changed hands in June, according to trade database Empirasign Strategies, down from 89.2% in the previous month.  

Earlier this year, low-rated companies could borrow cash to pay a special dividend to their owners. That market is now mostly shut. Monday, headphones maker Beats Electronics LLC pulled a debt deal that would have paid its owners a dividend, citing market conditions. 

The quickly falling prices have shaken investors in the often sleepy municipal-bond market, and trading has become choppy. 

Burton Mulford, portfolio manager at Eagle Asset Management, said he put up for sale Monday morning four blocks of bonds each averaging about $2 million in size and only received about two bids on each bond. "In a good market, we'd see 20 to 25 bids," said Mr. Mulford, whose firm oversees about $2 billion in munis. 

Dealer R. Seelaus & Co.'s head of municipal bonds, Michael Cornell, said he has never seen more bonds up for sale in his 20-year career. "I've got people calling me that I haven't talked to since 2008 because they can't get a bid," he said.  

Corporations and investors have been eager to buy derivatives that protect them against rising rates, said dealers. The cost of such derivatives, which allow the investor to sell Treasury futures at a specific price, has gone up. 

Dealers don't want to take the risk of being on the other side of that trade, or betting rates will fall, so they are selling Treasury bonds to hedge their exposures, exacerbating the rise in yields. 

"We're beginning to see the process feed upon itself," said Edward Lashinski, director of global strategy and execution for RBC Capital Markets' futures group.
 
 
—Matt Wirz, Carolyn Cui and Mike Cherney contributed to this article.