Tag Archives: Corporate bonds

Infinite money printing: Fed now buying ETFs, by Simon Black

Posted on May 13, 2020 | Leave a comment

The Fed will have to get more printing presses and run them 24/7 to have any chance of bailing out the billions in corporate debt that will otherwise default. From Simon Black at sovereignman.com;

Just when you thought they couldn’t come up with any more crazy ideas, the Federal Reserve announced last night that they will start buying Exchange Traded Funds, effective immediately.

Just to be clear, this means that the Fed is going to conjure money out of thin air, and then use that new money to buy ETFs.

But not just any ETF. The Fed is specifically targeting ETFs that own corporate bonds.

The key idea here is that the Fed is trying to bail out bankrupt companies across the Land of the Free.

Under normal circumstances, most medium and large businesses regularly issue corporate bonds (which is a type of debt) to help fund their companies.

This is pretty normal; even very strong and healthy businesses regularly go into debt by issuing bonds.

For example, Apple has been wildly profitable for years. But the company has about $90 billion in debt according to its most recent financial statements, plus they just issued another $8 billion in bonds last week.

Companies all over the world do this, and the total size of the global corporate bond market is absolutely enormous– tens of trillions of dollars.

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Leveraged Loans Blow Out. Distressed Corporate Debt Spikes, by Wolf Richter

Posted on March 23, 2020 | 1 comment

James Grant once said something to the effect that reaching for yield is more dangerous than reaching for razor blades in the dark. He was right, as the last few weeks have amply demonstrated. From Wolf Richter at wolfstreet.com:

This is the moment when yield-chasing turns into a massacre.

Leveraged loans – they’re issued by junk-rated overleveraged companies with insufficient cash flows – are part of the gigantic pile of risky corporate debt that is now being brutally repriced as concerns over credit risk (the risk of default) are finally bubbling to the surface. Since February 22, the S&P/LSTA US Leveraged Loan 100 Index, which tracks the prices of the largest leveraged loans, has plunged 20%:

The index is another example of how in these crazy times, when the most splendid Everything Bubble collided with the coronavirus, ever more financial metrics are violating the WOLF STREET beer mug dictumthat “Nothing Goes to Heck in a Straight Line.”

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China Faces “Systemic Risk” From Debt Cross-Default “Chain Reaction”, Top Central Bank Advisor Warns, by Tyler Durden

Posted on December 22, 2019 | Leave a comment

Chinese debt is one of the “Big Three” situations currently threatening to spark a worldwide financial crisis. The other two are European banks and the US repo market explosion. Grab your favorite movie refreshments; 2020 promises to be interesting. From Tyler Durden at zerohedge.com:

Just days after China’s “moment of reckoning” in the dollar bond market arrived, when China was rocked by not only the biggest dollar bond default in two decades but also the first default by a massive state-owned commodities trader and Global 500 company, when Tianjin’s Tewoo Group announced the results of its “unprecedented” debt restructuring which saw a majority of its bondholders accepting heavy losses, and which according to rating agencies qualified as an event of default, last week a top adviser to China’s central bank warned of a possible “chain reaction” of defaults among the country’s thousands of local government financing vehicles after one of these entities nearly missed a payment this month.

As the FT reported, Ma Jun, an external adviser to the People’s Bank of China, called on the government to introduce “intervention mechanisms” to contain the risk associated with LGFVs — special entities used in the country to fund billions of dollars of roads, bridges and other infrastructure.

“Among the tens of thousands of platform-style institutions nationwide, if only a few publicly breach their contracts it may lead to a chain reaction,” Ma said in an interview published on Wednesday in the state-controlled Securities Times newspaper, adding that “measures should be created as soon as possible to prevent and resolve local hidden debt risks to effectively prevent the systemic risks of platform default and closure.”

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Are The Rating Agencies Complicit In Another Massive Scandal: A WSJ Investigation Leads To Shocking Questions, by Tyler Durden

Posted on October 22, 2019 | Leave a comment

The bond ratings agencies rate a lot of companies right at the dividing line between investment grade and non-investment grade (“junk”) because if they downgrade a company into non-investment grade, even if the company deserves it  a lot of institutional holders of the bonds must sell, and the rating agencies worry about a cascade of sales and financial panic. From Tyler Durden at zerohedge.com:

Over the past two years, a key event many bears have cited as a potential catalyst for the next market crash, is the systematic downgrade of billions of lowest-rated investment grade bonds to junk as a result of debt leverage creeping ever high, coupled with the inevitable slowdown of the economy, which would lead to an avalanche of “fallen angels” – newly downgraded junk bonds which institutional managers have to sell as a result of limitations on their mandate, in the process sending prices across the corporate sector sharply lower.

As we discussed in July, the scope of this potential problem is massive, with the the lowest-rated, BBB sector now nearly 60% of all investment grade bonds, and more than double the size of the entire junk bond market in the US, and 3.4x bigger than the European junk bond universe.

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Treacherous Times for Bond Funds Ahead, by Wolf Richter

Posted on November 29, 2018 | Leave a comment

Why you’re better off owning high-quality individual bonds rather than bond funds or ETFs when the bond market is going to hell. From Wolf Richter at wolfstreet.com:

Bond ETFs and open-end bond mutual funds sound conservative in marketing materials, but they pack special risks & surprises in a downturn that can entail a catastrophic loss for investors.

Exchange-traded bond funds and bond mutual funds are big business. They’re a lot easier for retail investors to buy and sell than the actual bonds, particularly bond ETFs, which trade on stock markets just like stocks — and can even be day-traded. But this liquidity for investors is precisely the potentially catastrophic problem.

And in this era of rising interest rates and deteriorating credit, bonds already have plenty of other problems.

Corporate America carries record amounts of debt. Part of this debt is in form of bonds (the other part is in form of loans). The amount of bonds outstanding has ballooned over the past five years, even as the credit quality has deteriorated. Now there are $6.1 trillion of investment-grade US-corporate bonds outstanding, according to Moody’s (plus over $1.2 trillion of “junk bonds”). These bonds are everywhere, including in bond ETFs and bond mutual funds, and therefore in retail investors’ portfolios.

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“A Daisy Chain Of Defaults”: How Debt Cross-Guarantees Could Spark China’s Next Crisis, by Tyler Durden

Posted on November 20, 2018 | Leave a comment

If everybody guarantees everybody else’s debt, what happens when one or entities default? It’s interesting, to say the least, and China my get very interesting. From Tyler Durden at zerohedge.com:

On November 8, China shocked markets with its latest targeted stimulus in the form of an “unprecedented” lending directive ordering large banks to issue loans to private companies to at least one-third of new corporate lending. The announcement sparked a new round of investor concerns about what is being unsaid about China’s opaque, private enterprises, raising prospects of a fresh spike in bad assets.

A few days later, Beijing unveiled another unpleasant surprise, when the PBOC announced that Total Social Financing – China’s broadest credit aggregate – has collapsed from 2.2 trillion yuan in September to a tiny 729 billion in October, missing expectations of a the smallest monthly increase since October 2014.

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The Intolerable Scourge Of Fake Capitalism, by MN Gordon

Posted on November 18, 2018 | Leave a comment

The yield spreads between lower and higher quality bonds are expanding, which is not usually a good sign for financial markets. From MN Gordon at acting-man.com:

Investment Grade Junk

All is now bustle and hubbub in the late months of the year.  This goes for the stock market too. If you recall, on September 22nd the S&P 500 hit an all-time high of 2,940.  This was nearly 100 points above the prior high of 2,847, which was notched on January 26th.  For a brief moment, it appeared the stock market had resumed its near decade long upward trend.

We actually did not believe in the validity of the September breakout attempt: the extremely large divergence between the broad market and the narrow big cap leadership was one of many signs that an internal breakdown in the stock market was well underway. It is probably legitimate to refer to the January 2018 high as the “orthodox” stock market peak – the point at which most stocks topped out. [PT]

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As Credit Markets Crack, Gundlach Tells Investors To Get Out Of Corporate Bonds… Now, by Tyler Durden

Posted on October 27, 2018 | 1 comment

High-yield (junk) bond yield spreads to safer bonds are widening out, and that’s generally not a good sign for financial markets. From Tyler Durden at zerohedge.com:

While credit markets ‘tightness’ had been proclaimed as a pillar of support for the bull thesis by many still clinging to hope, that is no longer the case.

While longer-term, credit spreads remain extremely compressed, in the short-term, high yield bond markets have started to crack notably wider…

Cash bonds appear to be outperforming (not widening as much) but this is due to managers, such as Aberdeen’s Luke Hickmane,preferring to use the considerably more liquid ETF and CDS markets to hedge before unwinding underlying cash positions.

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Corporate Bond Market in Worst Denial since 2007, by Wolf Richter

Posted on February 4, 2018 | Leave a comment

Corporate bonds, because they offer higher yields than government bonds, are trading at very thin spreads to government bonds in the yield-starved investment world. As government bond yields move up, corporate bond yields will move up even more. From Wolf Richter at wolfstreet.com:

It’s just a question of how disruptive the adjustment will be, whether it will be just a painful sell-off or junk-bond mayhem.

Treasury securities have been selling off and Treasury yields have been rising, with the two-year yield at 2.15% on Friday, the highest since September 2008, and the 10-year yield at 2.84%, the highest since April 2014. Rising yields mean that bond prices are falling, and this selloff has been an uncomfortable experience for holders of Treasury securities.

But corporate bonds have been in their own la-la-land, and even Tesla, despite its cash-burn rate that should scare the bejesus out of investors, was able to sell $546 million in bonds last week – bonds collateralized by lease payments it receives from customers that have leased its cars.

S&P rates Tesla “B-minus,” a highly speculative rating just one notch above the deep-junk rating of triple-C. But no problem. Yield-desperate, risk-blind bond investors had the hots for these auto-lease-backed securities, according to Bloomberg:

The sought-after debt deal allowed Tesla to slash the risk premiums it would pay on the notes. They were sold to yield between 2.3 percent and 5 percent. At initial offered prices, investors had put in orders for as much as 14 times what the electric-car maker intended to sell on some slices of an asset-backed security, according to people familiar with the matter.

Junk-rated and cash-burning Netflix, or oil-and-gas companies drilling billions into their fracking endeavors, and many other junk-rated companies such as Fiat-Chrysler are in hog-heaven, with high demand for their debt, which pushes down the yield for investors and the costs of borrowing for the companies.

And the spread between average junk-bond yields and equivalent Treasury yields has now fallen to just 3.29 percentage points. That’s the premium investors demand to be paid for taking on the additional risk of junk bonds versus Treasury securities.

To continue reading: Corporate Bond Market in Worst Denial since 2007

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The ECB Morphs into the Mother of All “Bad Banks”, by Don Quijones

Posted on July 20, 2017 | Leave a comment

The European banking system is still one of the prime contenders to kick off the next global financial crisis. From Don Quijones at wolfstreet.com:

More than just a few “fallen angels.”

As part of its QE operations, the ECB continues to pour billions of freshly created euros each month into corporate bonds – and sometimes when it buys bonds via “private placements” directly into some of Europe’s biggest corporations and the European subsidiaries of non-European transnationals. Its total corporate bond purchases recently passed the €100 billion threshold. And it’s growing at a rate of roughly €7 billion a month. And it’s in the process of becoming the biggest “bad bank.”

When the ECB first embarked on its corporate bond-buying scheme in March 2016, it stated that it would buy only investment-grade rated debt. But shortly after that, concerns were raised about what might happen if a name it owned was downgraded to below investment grade. A few months later a representative of the bank put such fears to rest by announcing that it “is not required to sell its holdings in the event of a downgrade” to junk, raising the prospect of it holding so-called “fallen angels.”

Now, sixteen months into the program, it turns out that the ECB has bought into 981 different corporate bond issuances, of which 34 are currently rated BB+, so non-investment grade, or junk. And 208 of the issuances are non-rated (NR). So in total, a quarter of the bond issuances it purchased are either junk or not rated (red bars):

The ECB initially said it would only buy bonds that are “rated” — and rated investment grade. Thus having a quarter of the bonds on its books either junk or not rated represents a major violation of that promise.

To continue reading: The ECB Morphs into the Mother of All “Bad Banks”

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