The premium investors receive for buying the junkiest credit—the spread to high-rated debt like US Treasury bills, notes and bonds—is insanely small, hardly any compensation for the additional risk. From David Stockman at davidstockmanscontracorner.com:
The financial system is loaded with anomalies, deformations and mispricings—-outcomes which would never occur on an honest free market. For example, the junk bond yield at just 2% in Europe is now below that of the “risk-free” US treasury bond owing solely to the depredations of the ECB.
Indeed, madman Draghi has purchased $2.6 trillion of securities since launching QE in March 2015, and during the interim has actually bought more government debt than was issued by all the socialist governments of the EU-19 combined!
Outrunning Europe’s deficit-addicted welfare states is quite a feat in itself, but that wasn’t the half of it. The ECB’s printing press became so parched for government debt to buy that it has ended up owning more than $120 billion of corporate bonds. In some recent cases, the ECB has actually taking down 20% or more of new corporate issues—an action that surely leaves the fastidious founders of its Bundesbank prodecessor turning in their graves.
In turn, the ECB’s Big Fat Thumb on the investment grade scale stampeded fund managers into the junk market in quest of yield, especially for BB rated paper which makes up 75% of the European high yield market. So doing, these return hungry managers have crushed the the yield on the Merrill Lynch junk bond index, driving it down from 6.4% in early 2106 to an incredible 2.002% last week.
That is to say, leveraged speculators in European junk have made 100% plus returns over the last 20 months on dodgy paper that should be yielding double or triple its current rate.
In fact, the current lunatic euro-trash yield is completely off the historical charts. Euro-junk rarely yielded under 5% in the past, and had spiked to upwards of 10% at the time of Draghi’s “whatever it takes” ukase, which, in turn, was modest compared to the 25% blow-0ff high during the depths of the financial crisis.
To continue reading: Mind the Junk—-This Ain’t Your Grandfather’s Capitalism