Credit spreads are widening, the junkier the credit the greater the widening, and default fears stalk the bond market. You’d think there was a debt deflation going on or something. Two from Tyler Durden at zerohedge.com:
EM Credit Risk Blows Out Dramatically Amid FX Bloodbath, Fed Fears, Political Risk
In the wake of the global commodities rout which recently saw prices touch their lowest levels of the 21st century, there’s been no shortage of commentary (here or otherwise) on the pain that’s been inflicted on commodity currencies and by extension, on EM.
As it stands, the world’s emerging economies face a kind of perfect storm triggered by a combination of the following factors: falling commodity prices, depressed Chinese demand, and the threat of an imminent Fed hike. All of this has contributed to capital outflows, which has in turn led some reserve managers to begin liquidating their store of USD-denominated assets to help offset the bleeding and indeed, it now looks as though Brazil will eventually be forced to capitulate and dip into the reserve cookie jar to help arrest the BRL’s terrifying slide.
All of this is of course complicated by idiosyncratic political risks.
Take Malaysia for instance, where the 1MDB scandal threatens the political career of Prime Minister Najib Razak.
Or Brazil, where President Dilma Rousseff’s abysmal approval rating and a fractious Congress have made implementing desperately needed austerity measures virtually impossible.
And there is of course Turkey, where Recep Tayyip Erdo?an has effectively plunged his country into civil war in order to preserve AKP’s dominance and pave the way for constitutional amendments that will allow him to consolidate his power.
The risks facing EM are in fact so acute and closely watched that the threat of accelerating capital outflows effectively forced the Fed to delay liftoff earlier this month.
To continue reading: EM Credit Risk Blows Out Dramatically
BofA Issues Dramatic Junk Bond Meltdown Warning: This “Train Wreck Is Accelerating”
On Tuesday, Carl Icahn reiterated his feelings about the interplay between low interest rates, HY credit, and ETFs. The self-feeding dynamic that Icahn described earlier this year and outlined again today in a new video entitled “Danger Ahead” is something we’ve spent an extraordinary amount of time delineating over the last nine or so months. Icahn sums it up with this image:
The idea of course is that low rates have i) sent investors on a never-ending hunt for yield, and ii) encouraged corporate management teams to take advantage of the market’s insatiable appetite for new issuance on the way to plowing the proceeds from debt sales into EPS-inflating buybacks. The proliferation of ETFs has effectively supercharged this by channeling more and more retail money into corners of the bond market where it might normally have never gone.
Of course this all comes at the expense of corporate balance sheets and because wide open capital markets have helped otherwise insolvent companies (such as US drillers) remain in business where they might normally have failed, what you have is a legion of heavily indebted HY zombie companies, lumbering around on the back of cheap credit, easy money, and naive equity investors who snap up secondaries.
To Continue Reading: B of A Issues Dramatic Junk Bond Meltdown Warning
STRAIGHT LINE LOGIC 