Tag Archives: Credit spreads

If you are looking for truth in markets, in bonds there are fewer lies. By Bill Blaine

The bond market has often been a canary in the coal mine for stocks, and it may well happen again. From Bill Blaine at morningporridge.com:

“Believe whatever you want about equities, but in bonds there is truth..”

This morning – The Stock Market Rollercoaster will continue a while longer, but a decisive divergence point is coming! Corporate debt is likely to crack on rising rates, price distortion, forgotten risk metrics, and rising defaults. It will signal the perilous financial health of some sectors – bursting the current bubble violently. Anyone for the last few choc-ices?

But first: a rumbustious Saturday evening in Dubai followed the Calcutta Cup Rugby Match between Scotland and England. I make that 2.5 in a row to Scotland – (I’m counting Scotland reversing a 40 point first-half deficit into second-half draw in 2019 as a win!). Interesting..  my nation of 5 million Scrappy Socialists with our paranoid fascination for blue face paint, blue flags, bagpipes and sharp pointy things, consistently thumps 60mm Englishmen who voted for Boris.

Is there a lesson in there somewhere…?

Meanwhile, back to the Unreal World, let me introduce you to a new Blain’s market mantra:  If you are looking for truth in markets, in bonds there are fewer lies.

Aren’t we having fun in the equity market. Up, Down, Shake it all about. Amazon down 15% one day and up 13% the next. Facebook among the most volatile stocks on the block. Around the globe investors wake up wondering if it’s a risk on or off day, wholly uncertain what they believe about equity market uncertainty… The question is why…?

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Traders Shocked As Largest Italian Bank Forced To Pay Six Times More Interest To Sell Bonds, by Tyler Durden

Rising interest rates and widening credit spreads are one good indication of financial stress. From Tyler Durden at zerohedge.com:

In the clearest indication yet of just how severe the recent spike in Italian yields has been on the country’s financial institutions, Italy’s largest bank, UniCredit, surprised the market today when it sold $3 billion in dollar denominated five-year bonds. To find a willing buyer, the bank had to pay the equivalent of 420 basis points over the euro swap rate, which is six times more than the 70 bps over swaps it paid on five-year euro senior non-preferred bonds just this past January.

The spread on the new issue was a shock as it represented a nearly 150bps concession to current market rates, and is an indication of just how much even the strongest Italian banks have to pay up if they hope to access capital markets during the ongoing Italian political turmoil.

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NIRP’s Revenge: Italian Bonds Plunge, Worst Day in Decades, by Wolf Richter

Some market reactions to the Italian economic and political crisis, from Wolf Richter at wolfstreet.com:

Markets wail and gnash their teeth as “normalization” of Italian yields sets in.

On Tuesday, Italian bonds had their worst day in Eurozone existence, even worse than any day during the worst periods of the 2011 debt crisis. And this comes after they’d already gotten crushed on Monday, and after they’d gotten crushed last week. And this happened even as the ECB is carrying on its QE program, including the purchase of Italian government bonds; and even as it pursues its negative-interest-rate policy (NIRP). As bond prices plunge, yields spike by definition, and the spike in the two-year yield was spectacular, going from 0.3% on Monday morning to 2.73% on Tuesday end of day:

But note that until May 26, the two-year yield was still negative as part of the ECB’s interest rate repression. On that fateful day, the two-year yield finally crossed the red line into positive territory.

To this day, it remains inexplicable why the ECB decided that Italian yields with maturities of two years or less should be negative – that investors, or rather pension beneficiaries, etc., who own these misbegotten bonds, would need to pay the Italian government, one of the most indebted in the world, for the privilege of lending it money. But that scheme came totally unhinged just now.

The 10-year Italian government bond yield preformed a similar if not quite as spectacular a feat. Over Monday and Tuesday, it went from 2.37% to 3.18%:

But here’s the thing: Italian bonds – no matter what maturity – should never ever have traded with a negative yield. Their yields should always have been higher than US yields, given that the Italian government is in even worse financial shape than the US government. Italy’s debt-to-GDP ratio is 131%, and more importantly, it doesn’t even control its own currency and cannot on its own slough off a debt crisis by converting it into a classic currency crisis, which is how Argentina is dealing with its government spending. The central bank of Argentina recently jacked up its 30-day policy rate to 40% to keep the peso from collapsing further.

To continue reading: NIRP’s Revenge: Italian Bonds Plunge, Worst Day in Decades

Clock Ticks on Balance Sheet Fiesta, by Lisa Abramowicz

The bell tolls, the clocks ticks, pick your cliche metaphor for US corporate debt (see “Neither a Borrower Nor a Lender Be,” SLL, 8/26/15). From Lisa Abramowicz at bloombergview.com:

Credit traders are sending an ominous message to U.S. companies: Either stop borrowing so much money or prepare to face some serious consequences.

Investors are now demanding a 61 percent bigger premium over benchmark rates to own top-rated bonds of industrial companies compared with June 2014. Such debt has lost 4.2 percent in the period when stripping out gains from benchmark government rates, with relative yields rising to 1.8 percentage points from 1.1 percent percentage points 16 months ago, Bank of America Merrill Lynch index data show.

Part of this is just saturation in the face of yet another year of record-breaking bond sales. Investment-grade companies have issued more than a trillion dollars of bonds so far in 2015 on top of the $5 trillion in the previous five years, data compiled by Bloomberg show.

But this year’s weakness in credit markets isn’t just a technical blip; it highlights a significant deterioration in corporate balance sheets. After all, what have these companies done with the money they’ve raised? They’ve bought back their own shares and paid dividends to their shareholders. What they haven’t done is use the money to improve their businesses.

It’s getting to the point where even stockholders are tiring of their companies’ repurchasing shares and borrowing money simply because it’s cheap. A Bank of America fund-manager survey last month showed that equity investors are essentially asking corporations to be more conservative with their balance sheets.

Here’s why: Top-rated non-financial companies have increased their median leverage to 2.2 times debt relative to income, compared with 1.6 times in 2011, according to data compiled by JPMorgan Chase.

To continue reading: Clock Ticks on Balance Sheet Fiesta

Chart Of The Day: Junk Credit Spreads Are Blowing Out, by David Stockman

From David Stockman at davidstockmanscontracorner.com: