Put aside, for now, any fears you may have that it will be hard to sell corporate bonds at reasonable prices should lots of other people also want to sell corporate bonds.
A chart of the US high yield debt default rate, the Federal Funds Rate, and high yield spreads over time suggests years of time before anyone need fret about credit quality. Or as Robert Michele of JP Morgan Asset Management puts it:
Credit cycles don’t end because of a lack of liquidity; they end because default rates rise. That generally happens after the US Federal Reserve has finished raising rates and has removed the proverbial punchbowl. When we look at the high yield market today based on spreads versus the US Fed funds rates versus defaults, we see that issues in credit tend to come approximately 12 to 18 months after the Fed rate cycle is completed, hence the three to five year time frame we’re predicting, if we presume the Fed will do about 2 years of tightening after starting later this year.
Here’s an arresting chart from CreditSights, which shows the face value of all dollar and euro corporate debt outstanding:
Junk bonds, or to be more polite, “high-yield” bonds, have had a glorious bull run since the start of 2009. The Barclays index of total returns more than tripled in five years:
So how is it going with new issuance in the high yield debt markets for corporate Europe? Middle-market investment bank RW Baird has the answers in its Global Leveraged Loans Quarterly, out this Thursday. Highlights:
Key Findings: Read more
Bank of America Merrill Lynch analyst Hans Mikkelsen is bullish on US corporate credit. With Europe awash with liquidity thanks to the ECB and excess demand for corporate bonds in the second quarter, he expects there to be the third consecutive quarterly rally.
Mikkelsen thinks this time is different — a daring statement to make if ever there was — because of an expectation that home prices will have hit a trough in the first quarter and that in “harsh stress tests US banks were shown to be extremely well capitalised”. And while the price of oil is a bit of a wildcard, if prices do significantly rise, the impact isn’t likely to be fully felt until later in the year. Read more
Choppy financial markets have rattled investor appetite for European high-yield bonds and left banks potentially unable to recoup large loans for buy-outs expected to be refinanced through debt sales in September, the FT reports. Morgan Stanley, HSBC and Deutsche Bank are among those to have underwritten leveraged takeovers for Polkomtel, Securitas Direct, Spie, Com Hem and Coditel when market conditions were more benign. Replacing the temporary bridge loans used to execute such deals with high-yield bonds will now prove difficult, if not impossible, for the more leveraged transactions, according to rival bankers. Morgan Stanley for one has already seen problems when it tried to sell bonds on behalf of Coditel in July. The cost of protecting high-yield debt against default in the derivatives markets has been hitting levels not seen since the worst of the financial crisis in late 2008.
From Data Explorers – a chart to show how shares on loan in iShares’ iBoxx high-yield corporate bond ETF have basically trebled since June 10:
Uh oh. This is worrying.
From Standard Chartered’s latest credit research report on Friday: Read more
It’s the clash of the high-yield press releases this Wednesday.
Here’s Standard & Poor’s, with a new high-yield report published at 9.55am London time: Read more
Maiden Lane’s no lady. She continues to harass Wall Street.
The Federal Reserve has been selling off the portfolio of dodgy Mortgage-Backed Securities (MBS) it acquired as part of its bail-out of AIG. Bloomberg reports that falls in the credit default swap (CDS) indices used to protect against losses certain types of debt has been accelerating this month. Read more
It’s money money everywhere and not that much to buy.
Citigroup credit strategist Matt King has a nice note out on Wednesday attempting to delve into the ‘cash on the sidelines‘ notion — or the idea that there’s a wall of money just waiting to be invested. (It’s true, of course. In the credit space, King points out that inflows to corporate credit have more than doubled since 2007, while net issuance has fallen. This means most new issues are oversubscribed and investors are left feeling they have to buy the market, regardless of whether they actually like it.) Read more
Here’s an interesting Wednesday story from the Financial Times’ Aline van Duyn.
It concerns growing demand for a synthetic product — this time linked to junk, or high-yield, bonds. The market size of the product (which is tranched and linked to Markit’s CDX index) is still relatively small. But demand for actual junk bonds has been strong recently — with average junk prices even hitting par value during 2010. Read more
Moody’s has released its full-year 2010 default rates for high yield bonds and loans, and unsurprisingly the improvement over 2009 was impressive:
The global speculative-grade default rate finished 2010 at 3.1%, a level very close to our one year ago prediction of 3.3%. The global rate stood at a much higher level of 13.1% in 2009 and 4.4% at the end of 2008. In the U.S., the speculative-grade default rate ended at 3.3% in 2010, down from 14.1% in 2009 and 4.9% in 2008. In Europe, the comparable rate closed at 1.9% in 2010, also down from 2009’s 11.3% and 2008’s 2.1%. … Read more
The Moody’s monthly report on speculative-grade default rates was released on Thursday, and it’s good news for investors with high-yield bonds and leveraged loans in their portfolios:
The issuer-weighted global speculative-grade default rate finished the third quarter at 4.0%, down from 6.2% in the second quarter. The global default rate is now below its historical average of 4.8% for the period of 1983-2009. On a year-over-year basis, the global rate has fallen more than two-thirds from a level of 13.2%. This decline corresponds closely with what we expected one year ago when Moody’s default rate forecasting model predicted a 4.5% rate. Read more