At the Brink
Doug Nolan
Crisis dynamics are reaching full force.
WTI crude prices approached $120 in Sunday’s wild overnight session.
Nasdaq futures were down as much as 2.6%.
In Monday trading, Japan’s Nikkei 225 index sank as much as 7.7%, following the previous week’s 5.5% drop.
South Korea’s Kospi was down almost 9%, adding to last week’s 10.6% slump.
Global bond markets were under heavy selling pressure.
UK gilt yields surged 17 bps Monday to almost 4.80% (14-month high), as two-year yields surged as much as 29 bps to 4.17%.
Italian yields were up 17 bps at the day’s high to 3.77% (11-month high).
In early Monday trading, 10-year Treasury yields were seven bps higher to 4.21%, though the more alarming moves were in the swaps market.
Indicative of mounting liquidity stress, the 30-year Treasury swap spread was down almost three points to a six-month low of 82 bps – continuing the steepest decline since April.
High-yield CDS jumped to the high since May.
Bank CDS also rose to 10-month highs.
“Biggest High Yield ETFs Drop to Fresh Nine-Month Lows.”
Precious metals prices were also under pressure (i.e., silver down 5.5%).
In short, myriad levered strategies were under intense pressure, with no place to hide.
March 10 – Bloomberg (Nishant Kumar and Liza Tetley):
“Some of the world’s biggest hedge funds known for their steady returns suffered hundreds of millions of dollars in losses last week after the war against Iran triggered wild market moves and hit portfolios across the industry.
Coatue Management’s hedge fund lost 3.8% last week and was down 2.4% this year through March 6…
Citadel’s main Wellington hedge fund lost 2% last week, with its macro business suffering declines…
ExodusPoint Capital Management’s multistrategy hedge fund last week gave away all the gains it had notched up for the year…
Hedge fund giant Millennium Management, which manages $86.7 billion, lost about $1.5 billion in the week through March 6…
At Point72 Asset Management, the 1.1% decline during the week cut its advance this year through March 6 to 3.4%...
Balyasny managed $32 billion, while Point72 oversaw $45.7 billion…
Marshall Wace’s flagship Eureka hedge fund was down 3.7% last week…”
March 11 – Bloomberg (Denitsa Tsekova):
“Hedge funds are experiencing the biggest drawdown since the Liberation Day tariff turmoil, as unwinds in crowded trades punish the fast-money cohort, according to JPMorgan… strategists.
Since the start of the Iran war, quants like commodity trading advisers have been hit by their worst stretch in almost a year, the strategists said...
Equity long-short hedge funds have also posted heavy losses due to their overweight positions in European and Korean markets and their underweight in software names, according to the bank.”
March 10 – Financial Times (Costas Mourselas, Ian Smith and Amelia Pollard):
“Citadel and ExodusPoint are among the big-name hedge funds to have been stung by the market fallout from war in the Middle East…
‘The vibe is very negative.’
He added that Wall Street believed US President Donald Trump would ‘drop a few bombs’ and then exit the conflict.
‘But it’s gotten far uglier than people thought’.”
The KBW Bank Index opened Monday’s session 3.6% lower, with Citigroup down 4.2%, Goldman Sachs 3.1%, Bank of America 3.8%, Wells Fargo 4.3%, Morgan Stanley 3.8%, and JPMorgan 3.2%.
At Monday’s lows, Bank of America had suffered a three-day decline of 7.0%, Goldman Sachs 8.4%, Citigroup 8.3%, Wells Fargo 8.1%, Morgan Stanley 8.0%, and JPMorgan 6.4%.
Monday morning headlines:
“Iran Crisis May Accelerate Private Credit Downturn.”
“Private Credit Gate-Crashers Are Forcing Funds Into Brutal Stop.”
“Private Credit Woes Could Become Data Center Difficulties.”
Things were turning panicky. At 35.3, the VIX (equities volatility) Index in early-Monday trading reached the highest level since April.
Importantly, with only 10 sessions until a massive (after intense hedging activity over recent weeks) quarterly options expiration, systemic risk was approaching extremes.
Sinking stock prices risked a self-feeding “flash crash,” with those on the wrong side of risk hedges forced into aggressive selling.
President Trump: “I think the war is very complete, pretty much.”
March 9 – Financial Times (Abigail Hauslohner, James Politi, Lauren Fedor and Jamie Smyth):
“Donald Trump said the US war against Iran would end ‘very soon’ as he sought to calm chaotic trading in the oil market that had sent prices spiralling to their highest in four years and threatened the global economy.
Speaking from his Doral resort…, the US president described the war the US has been waging against Iran since February 28 as a ‘little excursion’ that had succeeded ‘much faster than we thought’ but declined to specify when it would end…
‘We’re looking to keep the oil prices down,’ Trump said.
‘They went artificially up because of this excursion’.”
March 9 – Axios (Barak Ravid):
“President Trump said the war with Iran will be over ‘very soon’ but made clear it will not happen this week.
Ten days after the war started, Trump has begun for the first time to point to the possibility of it winding down soon…
Some U.S. officials think Trump’s comments were aimed at calming the stock markets in the U.S. and around the world…
Iran’s Islamic Revolutionary Guard Corps said in response to Trump’s comments that they ‘are the ones who will determine the end of the war,’ per state media.”
In a dramatic reversal, the VIX sank from 35 to close a wild session at 25.5.
The Nasdaq100 ended Monday’s session 1.3% higher, rallying 2.8% off lows.
The Banks (KBW Index) and the Broker/Dealers rallied about 3.5%, to erase earlier losses.
High-yield CDS reversed 25 lower to 335 bps.
Ten-year Treasury yields dropped from 4.21% to 4.10%.
After almost touching 4.80%, 10-year gilt yields reversed 16 bps.
Indicative of acute instability in EM bonds, Brazilian local currency 10-year yields sank 43 bps from intraday highs to end Monday’s session at 13.82%.
A much-welcomed, well-timed Trump “put” subdued crisis dynamics, at least temporarily.
Overhanging markets is the uncertainty of how much the President’s market-backstop credibility has left in the tank.
By the end of the week, assertions that the war was “already won,” was “complete,” and will end “soon” with “practically nothing left to target” rang hollow.
“PENTAGON IS MOVING MORE MARINES, WARSHIPS TO MIDDLE EAST.”
“WSJ: USS TRIPOLI, ATTACHED MARINES NOW HEADED FOR MIDEAST”
Clearly, the President and his administration did not anticipate Iran’s intense and compressive war response.
They also don’t appreciate our vulnerabilities.
We undoubtedly have the most powerful military in human history.
But there is also the greatest financial Bubble ever, with implies perilous market, financial, economic, and social risks.
Understandably, Iran’s war effort is focused on exploiting our and the world’s vulnerabilities, starting with the Strait of Hormuz and oil prices.
March 12 – Financial Times (Vali Nasr):
“Two weeks into the war, Iran’s strategy is coming into sharper focus.
It initially set out to absorb American and Israeli strikes while retaliating against Israeli cities and US bases with drones and missiles in an attempt to deplete their stockpiles of interceptors.
The long-term plan was to preserve larger and more lethal missiles for the second phase of the war.
But Iran has also deployed a parallel — and potentially more effective — strategy: waging war on the global economy.
Iranian missiles and drones attacked oil and natural gas facilities in Qatar, Saudi Arabia and the UAE along with oil tankers in the Gulf, and restricted passage through the Strait of Hormuz, in effect closing it and leading to spikes in oil prices…
In war, geography matters as much as technology.
Iran commands the entire northern shore of the Gulf, looming large over energy fields on its southern shore and all that passes through its waters.
Its Houthi allies are perched at the entrance to the Red Sea and along the passage to the Suez Canal; Iran is thus perfectly positioned to squeeze the global economy from both sides of the Arabian Peninsula.
Those in command of Iran today are veterans of asymmetric wars in Iraq and Syria.
They are now applying the same strategy to fighting the US on the battlefield of the global economy.
Drones, short-range missiles and mines setting tankers and ports on fire can have the same effect IEDs had in Iraq, only with greater impact — disrupting global supply chains and sending oil prices higher.”
The President’s talk of “regime change” and “unconditional surrender” has quieted.
Iran has floated terms for a potential truce: an end to bombings, security guarantees, recognition of rights, and financial reparations.
At some point, we’ll see how far from “unconditional surrender” President Trump will tolerate.
But for now, the commander and chief is determined to hit Iran “very hard” – it will end “when I feel it in my bones.”
“Investors Confront Worst-Case in Strait of Hormuz.”
If the U.S. cannot get tankers moving through the Gulf soon, it’s also a worst-case scenario for vulnerable global markets.
March 11 – Guardian (Jillian Ambrose):
“It’s official: the International Energy Agency has ordered the largest release of government oil reserves in its history to help calm the oil price shock triggered by the US-Israeli attacks on Iran.
The world’s energy watchdog said its 32 members had agreed unanimously to release about 400m barrels of emergency crude, a third of the group’s total government stockpiles and more than double the IEA’s previous biggest release.
The emergency intervention far outstrips the 2022 release of 182m barrels of oil by IEA countries after Russia’s full-scale invasion of Ukraine.”
WTI traded below $80 in Tuesday afternoon trading.
The Trump administration has aggressively moved to put a lid on oil and gas prices: offering 40% of the nation's SPR; the easing of Russian oil sanctions; and Jones Act waivers.
Ominously, crude closed the week up 8.6% to $98.71.
It’s not at all clear that the Iranian Revolutionary Guard (IRGC) will be bombed into submission.
Can the U.S. military effectively and expeditiously gain control of the Strait of Hormuz and protect vessels in the Gulf and Red Sea?
Will Gulf oil infrastructure be protected from Iranian and proxy forces attacks?
“Iran Deploys Explosive ‘Suicide Skiffs’ Disguised as Fishing Boats in Strait of Hormuz.”
“Iran’s Sea Mines Are One of Its Most Powerful Weapons.”
March 13 – Bloomberg (Denitsa Tsekova):
“Market stress is building at the fastest pace since last year’s tariff shock, as the war in Iran pushes oil prices higher, drives up borrowing costs and strengthens the dollar — a combination that is putting pressure on virtually every corner of financial markets at once.
A Bank of America index that measures future price swings implied by global options markets in equities, rates, currencies and commodities has jumped to 0.79, not far from the 0.89 peak it reached during the Liberation Day turmoil in April last year…”
That “every corner of financial markets at once” is the urgent issue for such a highly levered system.
Losing money across the markets quickly puts intense pressure on the leveraged speculating community.
The BofA volatility index (noted above by Bloomberg) surged 0.71 over two weeks, comparable to moves during last year’s “liberation day,” March 2023’s SVB banking crisis, and the September 2022 gilts deleveraging.
After trading down to a Tuesday afternoon low of 22, the VIX closed the week at 27.21.
The MOVE (bond volatility) Index spiked 12 points this week (to 91), trading Thursday (95) at the high since June.
The Cboe high yield volatility index (VIXHY) spiked 62 in three sessions (Wed-Fri) to the high since “liberation day” instability.
The Cboe Crude oil VIX surged 54 in two weeks to 119, the highest level since Covid April 2020 instability.
The KBW Bank Index’s 4.2% drop put three-week losses at 13.1% - matching “liberation day” period losses.
Losses this week included Fifth Third (8.3%), Western Alliance (8.0%), Wells Fargo (7.9%), and Regions Financial (7.5%). Goldman dropped 4.8%, Bank of America 4.0%, and JPMorgan 2.1%.
Three-week losses are not pretty: Western Alliance (27.2%), Fifth Third (19.1%), Regions Financial (16.8%), Wells Fargo (16.5%) and Trust Financial 16.2%).
Goldman was 15.2% lower over three weeks, Bank of America 12.0%, Citigroup 8.9%, and JPMorgan 8.8%.
Robinhood fell 4.8% this week.
Morgan Stanley CDS jumped another five this week to 72 bps (high since April), with a notable three-week spike of 19 bps.
Bank of America CDS rose five to 67 bps (3-wk gain 16bps), and Wells Fargo CDS gained five to 57 bps (3-wk gain 12bps) – both to highs since early May.
Goldman (68bps) and JPMorgan (48bps) CDS gained three – both to 10-month highs.
Investment grade CDS rose three to a 10-month high of 62 bps.
European (subordinated) Bank CDS rose another seven this week to 118 bps, the highest close since early May.
This CDS spiked 27 bps in three weeks, the largest move since “liberation day.”
European high yield (“crossover”) CDS jumped another 18 bps this week – to the high since June – with a three-week surge of 60 bps (largest since April).
Deleveraging has gained momentum in key global bond markets.
UK 10-year yields spiked 20 bps this week to 4.82%.
Yields have surged 59 bps since the outbreak of the war (2 weeks).
Gilt yields are only six bps from January’s 18-year (2008) high.
Greek yields jumped 18 bps to 3.78% - the high back to November 2023 (2-wk rise 51bps).
Italian yields rose 17 bps to a post “liberation day” high of 3.79% (2-wk rise 52bps).
French yields were up 45 bps in two weeks (3.67%), with German yields rising 34 bps (2.98%).
After massive “hot money” inflows into EM over recent quarters, flows abruptly reversed.
It’s fair to assume unprecedented leverage accumulated throughout the EM bond universe – “carry trades,” “basis trades” and myriad derivatives strategies.
EM CDS surged 15 bps during Thursday/Friday trading (largest 2-session gain since “liberation day”), to the high (153bps) since October (19bps 2-wk gain).
EM bond market deleveraging is now in full force.
Local currency bond yield rises this week include Turkey 47 bps, Brazil 44 bps, Philippines 42 bps, Mexico 34 bps, and South Africa 23 bps.
Brazilian yields ended the week at the highest level (14.32%) since “liberation day.”
Mexican yield spiked 60 bps in seven sessions to eight-month highs (9.42%).
South African yields surged 65 bps in six sessions to 9.03%.
Brazil’s dollar bond yields surged 22 bps this week to 6.23%, with Mexican dollar yields rising 22 bps to 5.95%.
The crisis of confidence encircling “private Credit” took a turn for the worse this week. Blue Owl sank another 11.5%, pushing 2026 losses to 41.4%.
Ares Management slumped 7.5% (down 37.0% y-t-d), KKR 5.9% (down 32.6%), Apollo Global 3.9% (down 27.9%), and Blackstone 3.3% (down 30.7%).
It has essentially become a “run” on illiquid holdings.
March 11 – Bloomberg (Olivia Fishlow):
“Morgan Stanley and Cliffwater LLC capped withdrawals from their multibillion-dollar private credit funds after investors sought to redeem vastly more than the vehicles allow.
Cliffwater’s $33 billion flagship private credit vehicle limited redemptions to 7% of shares in the first quarter, after investors sought to pull a record 14%.
Morgan Stanley’s North Haven Private Income Fund, which has almost $8 billion in assets, returned around $169 million, or less than half of investors’ tender requests…
The moves are among the starkest examples yet of private credit funds grappling with a wave of redemption requests amid growing concerns over the quality of their loans, particularly to software companies under threat from artificial intelligence.”
March 11 – Bloomberg (Olivia Fishlow):
“Cliffwater LLC’s flagship private credit fund capped redemptions at 7% in the first quarter, after investors sought to pull about 14% of shares in one of the biggest withdrawal requests for such a vehicle in the $1.8 trillion market.
Shareholders on Tuesday requested a record amount of their money back from the $33 billion Cliffwater Corporate Lending Fund, the second largest private credit vehicle targeting retail investors.
As an interval fund, it’s required to repurchase shares every quarter.”
March 11 – Reuters (Manya Saini):
“Wall Street banking giant Morgan Stanley has limited redemptions at one of its private credit funds after investors sought to withdraw almost 11% of shares outstanding…
The Wall Street powerhouse signaled that the private credit industry faces several challenges, including uncertainty around an M&A recovery, speculation about credit deterioration and a contraction in asset yields.”
There are a series of big shoes to drop.
Wall Street increasingly questions the quality of loans throughout the “private Credit” universe.
So far, attention has been focused on software companies vulnerable to AI advancements.
I’m increasingly of the view that portfolios of software company loans, having so ballooned over recent years, were likely of suspect quality all along.
AI just sped up the inevitable day of reckoning.
The collusion between “private equity” aggressive borrowing and “private Credit” lax financing is coming back to haunt “private markets”.
In software and throughout “private Credit” and “leveraged lending,” there are today hundreds of billions of loans facing serious refinancing risk, as the industry increasingly succumbs to illiquidity and market dislocation.
Expect intense focus on loan valuation.
March 11 – Financial Times (Sujeet Indap and Antoine Gara):
“Private credit lenders such as Blue Owl are obscuring weaknesses in their portfolios and a sharp correction in debt markets is approaching soon, a US distressed debt investment fund has told its investors.
Glendon Capital Management, a $5bn… fund, wrote… that private credit funds managed by Blue Owl and many of its rivals had ‘misrepresented’ loss rates in their portfolios and were sitting on ‘larger losses than reported’…
The fund focused its criticisms on how Blue Owl had valued loans inside one of its largest funds, the $17bn Blue Owl Capital Corporation.
It noted the fund’s higher marks on its loans, made at the end of 2025, compared with current public trading prices of debts tied to the very same companies, which gave it ‘concerns about the true valuation’ of its portfolio.
Glendon said loans at multiple companies inside the Blue Owl credit fund, called OBDC, where the lender had marked riskier junior slices of debts it held at values meaningfully above the recent public trading prices of safer, more senior debts issued by those same companies.”
This is still early crisis stage.
Not much talk yet of insurance industry exposures or upheaval in the bloated annuities complex, both critical facets of this high-risk lending Bubble.
Expect a wave of ratings downgrades.
Importantly, the reversal of speculative flows has unleashed alarming “run” dynamics.
The banks are getting nervous – and it certainly doesn’t help that yields are now rising, market risk indicators are surging, and uncertainty overwhelms.
At least at the “periphery,” significant Credit tightening has commenced.
Defaults to follow.
March 12 – Bloomberg (Claire Ruckin, Ellen DiMauro, and Paula Seligson):
“Private credit funds, already on the defensive amid an unprecedented investor exodus and a number of defaulting borrowers, are now bracing for a battle with their go-to lenders: major banks.
JPMorgan’s… recent decision to curb some lending after cutting the value of certain loans due to AI disruption has the industry on high alert about threats to ‘back leverage.’
This form of borrowing against a portfolio of assets, though hardly exclusive to private credit, has turbocharged the rise of direct lending.
In good times, back leverage can potentially help tip 8% or 9% gains into double-digits…
Exact numbers on back leverage are hard to come by.
Moody’s Ratings has said US banks as of June extended about $300 billion of loans to private credit funds, direct lenders and business development companies, as well as securitized products like collateralized loan obligations.”
It was two weeks ago tonight (just as I posted the CBB) that I saw the initial headlines of U.S. bombing operations in Iran.
I certainly didn’t feel good about the world last Friday.
I am even more alarmed tonight.
“The Pentagon is Moving Additional Marines and Warships to the Middle East, as Iran Steps up its Attacks.”
“Trump Says US ‘Obliterated’ Military Targets on Iran’s Kharg Island, Threatens Tougher Action if Hormuz Shipping is Disrupted.”
“Iran Threatens U.S.-Linked Oil Targets After Trump Says Kharg Bombed.”
“Iran, US Threaten Attacks on Oil Facilities.”
“Israel Planning Massive Ground Invasion of Lebanon, Officials Say.”
“Hezbollah says ready for long battle as Israel threatens Lebanese infrastructure.”
“Iran is Gearing up for a Long War of Attrition Against Israel and the US.”
March 14 – AFP:
“Iran’s armed forces threatened on Saturday to destroy US-linked oil infrastructure after President Donald Trump said the United States had bombed Iran’s oil hub Kharg Island.
The military’s Al-Anbiya Central Headquarters said in a statement cited by Iranian media that oil and energy infrastructure belonging to firms that cooperated with the United States would ‘immediately be destroyed and turned into a pile of ashes’ if Iran’s energy facilities were attacked.”
The odds of war escalation spiraling completely out of control are not slim.
Highly speculative and levered global financial markets are acutely vulnerable.
The probability of a spiraling de-risking/deleveraging dynamic is alarmingly high.
U.S. markets need to get through Friday’s quarterly expiration without an accident.
March 14 – Financial Times (Joe Miller):
“One of Donald Trump’s close White House advisers has called for the US to ‘find the off-ramp’ in its conflict with Iran, the first public signal of discontent over the war from a senior figure in his administration.
‘This is a good time to declare victory and get out,’ David Sacks, Trump’s AI and crypto tsar, said…
Such a move ‘is clearly what the markets would like to see’, he added.”
The entire world desperately wants President Trump to declare victory and find an off-ramp.
While a Truth Social post could at any time shift momentum, the President appears more interested in bombing Iran into submission than seeking some type of negotiated settlement.
And it’s difficult to contemplate anything good coming from the degree of death and destruction required for Iranian leadership to cry uncle.
Iran has oil, Russia, China, know-how, and a long history of perseverance.
If the regime can only hold together, they can rebuild.
Iran has, however, lost much of its deterrent.
They’re determined to hold out long enough for intolerable pressure to force Trump to pursue an offramp.
Their surviving deterrent is the will to inflict sufficient pain to ensure the U.S. and Israel think twice in the future.
And it’s pretty obvious they are resolved to exploit all avenues to unleash as much economic and market chaos as possible.
It’s such a hostile backdrop for so many things, including market leverage.
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