Last week all eyes were on the Short Squeeze In Financials, triggered by a SEC Order To Protect Those Most Responsible For Naked Shorting, and fueled by nearly everyone going ga-ga over fabricated earning reports at Wells Fargo and Citigroup.

However, most missed the quiet but extremely important action in the corporate bond market. Please consider Bond Sales Slow to $5.3 Billion as Spreads Approach March Highs

Corporate bond sales fell to $5.3 billion this week as the yield over benchmark rates that investors demand to own the debt approached the highest levels of the year. Sales compare with $11.7 billion last week, according to data compiled by Bloomberg.

Issuance slowed as the average spread on investment-grade bonds climbed to 7 basis points shy of its 2008 high and junk- bond spreads surpassed 800 basis points for the first time since March.

Overall corporate sales compare with a weekly average this year of $21.2 billion.

The extra yield investors demand to own investment-grade bonds rather than U.S. Treasuries climbed 9 basis points to 297 basis points as of yesterday, compared with 305 basis points reached on March 20, according to Merrill Lynch & Co.’s U.S. Corporate Master index.

The strong rally brought out bottom callers in financials who made an appearance for the umpteenth time. And if oil prices keep falling, perhaps the rally will continue for a bit more on the misguided notion that lower energy prices will help the economy. They won’t. Falling oil prices will be a result of falling demand and a weakening global economy. Weakening job prospects will come on on top of it.

The key point however, is the odds of a sustainable rally in the wake of such poor action in the corporate bond market is highly unlikely regardless of what oil prices do.

Mike “Mish” Shedlock
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