(From Gunshow, click through for full comic)
One stereotype of equity investors is that they stay seated and calm long after bond investors have hit the fire alarm and exited the building. It is perhaps a little unfair today, given that everyone is panicking. But two bearish high yield credit strategy notes this week suggest that evacuating one building may not be enough and that it’s perhaps time to flee the entire city and head for the hills. Read more
History never repeats and most analogies are wrong, but there are some intriguing parallels between the global macro environment in 1997-8 and today.
Back then, the Federal Reserve controversially chose to ease policy, first by refraining from rate hikes anticipated by the markets and then by cutting its target for Fed funds by 75 basis points. Many believe this choice inflated equity prices and encouraged excessive business investment at a time when America’s economy was already running hot. Despite the subsequent fillips of tax cuts, a boom in defence spending, and a housing bubble, the aftermath was a massive decline in employment and painfully slow recovery.
A simple comparison between conditions then and now suggests the Fed’s explicit desire to “normalise” financial conditions may come from a desire to avoid repeating the experiences of the late 1990s. Whether policymakers are right to prioritise the real economic data, which tells us what’s already happened, over the action in the financial markets, which tends to affect what will happen, is anyone’s guess. Read more
Even if Third Avenue’s recent shuttering and Stone Lion’s closing of its $400m credit fund — which was run by former Bear Stearns high-yield bond traders Gregory Hanley and Alan Mintz according to the FT — are less a signal of worse to come and more just the closing of idiosyncratic (heavily juiced up) funds, it’s still, according to Goldman, going to be the worst non-recession year for HY since 1983.
With our emphasis:
HY returns have sunk to their lowest level on the year as the pressure from lower oil prices continues to constrain risk appetite. As we go to press, the HYG ETF is down roughly 5% year-to-date. If the weakness persists until the end of the year, 2015 could become the worst non-recession year for HY
Alternate title: How much credit would a credit checker check if a credit checker could check credit?
Just when you think nothing can stop the march of cheap (in this case US) debt…
A simple question come for you, via UBS’s Matthew Mish and Stephen Caprio: will credit markets be able to absorb the refinancing needs of lower quality high yield and leveraged loan borrowers?
There’s plenty of discussion about why the oil price collapsed (read Izzy’s take on the changed structure of the market, for one), but consider a broader question: if markets can be so wrong about the price of one of the most widely used and heavily traded commodities, what else are they missing?
We ask because a halving in the price of other markets may not be cheered in the same way as cheap oil. We also wonder what it says about how orderly (or otherwise) big market declines will be, when they eventually roll around. After all, major currency pairs don’t move by a fifth in one morning…
To that end, here’s a reminder of what a 50 per cent decline looks like for a selection of markets, and the last time that level was hit. Read more
If you buy this…
… keep reading. Read more
Record outflows? Check.
Highly illiquid market that has been outstripped by demand and which may have become disconnected from reality? Check.
BTFD? Hmmm. Read more
Your recent flight to safety and the pain of carry trades in the face of Ukraine and the FOMC, charted and worded by Hartnett and BofAML:
Looking at total returns, stocks and bonds are up around 4% year-to-date while commodities are down 1.4%. But since July 16th, the day prior to the downing of flight MH17, the US dollar has outperformed all major currencies, cash has outperformed all major asset classes (see Table 1) and the only equity markets showing gains are China, Kazakhstan, Saudi Arabia & Egypt. Of particular note, the combination of a geopolitical flight to quality and concerns about the end of the era of excess liquidity appears to have caused the three big “carry trades” of 2014, high yield bonds, European peripheral bonds and EM debt, to be “carried out”
Last week, Kit Juckes at SocGen was one of many analysts who, after looking at the latest FOMC minutes, found fit to arrive at one overriding conclusion: the era of Risk-on, Risk-off (RoRo) investing is arguably coming to an end.
As he explained… Read more
Take note of the following story from IFR. It could turn out to be very important:
Jan 4 (IFR) – The yield-to-worst in the high-yield market dipped to its lowest level ever this week, as risk markets rallied on the fiscal cliff agreement. Dropping below 6% for the first time in history, the yield to worst on the Barclays high-yield index fell to 5.96% on Wednesday and pushed even lower to 5.90% on Thursday. This compares to 6.13% on Monday and 8.14% at the start of 2012. Read more
Shandong Helon. Remember the name.
HSBC analysts have pointed out an interesting possible ‘first’ for China (H/T the FT’s Tracy Alloway): Read more
Or: do wide high yield spreads over US Treasuries predict a recession?
We ask because this is an interpretation we’ve seen a fair bit in the media over the last few weeks. Read more
Yield, like love, can cause trouble when you search too hard for it.
Paul Fisher, executive director for markets at the Bank of England, on Wednesday gave a speech surveying the current state of financial markets. 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
As FT Alphaville has written before, the volatility is out there.
You just have to look for it — and not by glancing at industry-standard, the CBOE Vix index. Read more
An uptick in mergers and acquisition activity is set to boost issuance in the US leveraged finance market as investors in Europe strike a note of caution on market dynamics there, according to the FT. Leveraged loan and junk bond issuance has been strong in the US this year, driven by companies’ efforts to refinance debt borrowed during the credit boom of the past decade. Bankers and market experts, however, are now pointing to a growing pipeline of deals related to M&A. The need for new money for loans and bonds to finance M&A deals, rather than refinance existing debt, could help to ease what has been a cash glut in both markets this year and reduce the instance of controversial financing structures, which have returned in the rally.
KKR announced Wednesday that Q4 2011 net income rose 39 per cent to $714.6m from $515.3 m in Q4 2010. This nudged us into thinking back to 2007:
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%. …
Another day, another story about the ongoing boom in junk debt. This time from Bloomberg:
The extra yield investors demand to own high-risk debt rather than government bonds has dropped 82 basis points this month to 540 basis points, or 5.4 percentage points, the lowest since Nov. 16, 2007, according to Bank of America Merrill Lynch’s U.S. High-Yield Master II index.
Courtesy of Reuters, a new milestone for junk debt issuance:
The volume of global high yield corporate debt topped $300 billion this week, shattering the all-time annual record for high yield bonds set in 2006 ($185.0 billion). Bolstered by triple-digit growth in the industrials and energy & power sectors, issuance during the fourth quarter of 2010 totals $90.4 billion from 186 deals, the biggest quarter, by proceeds raised and number of deals, since records began in 1985.
Jake of Econompic Data on Monday posted a couple of interesting charts emphasizing the remarkably similar performance this year of corporate bonds with different ratings:
Retail investors in the US have sharply increased their direct buying of junk bonds in the third quarter of the year, providing evidence of a trend of “yield chasing” that is worrying regulators, reports the FT. Finra, which regulates US securities firms, said the trend was a concern given the risks involved in this part of the corporate bond market. Corporate bond trading activity analysed by Finra shows that the ratio of buying relative to selling of junk bonds by retail investors has jumped in the last quarter. Junk bonds, also called high-yield bonds, are sold by companies with ratings below investment grade, a category which has a higher risk of default.
We think a few points are worth highlighting from the M&A and capital markets snapshots just released by Thomson Reuters.
First, after an extraordinary first half of the month, the year’s junk bond rally (which we’ve been monitoring) completely fizzled in the second half: Read more
Are passive bond funds set to become the oil index funds of tomorrow?
Oil funds, of course, made sense when inflation was the worrying factor for investors. But with deflation quickly becoming a more prominent fear, it makes sense that investors search out any option where yield can be guaranteed. Any yield. Read more
It seems equities, commodities and currencies are not the only asset classes running increasingly correlated returns, FT Alphaville writes. There’s a similar trend popping up in high-yield securities and the VIX index. Are fundamentals becoming a sideshow? Read more