Credit Bubble Bulletin

Credit Bubble Bulletin 2018-10-30T12:00:02+00:00

Presented by Doug Noland

Weekly Commentary

February 8, 2019: Delusional

February 8 – Bloomberg (Brian Chappatta): “Bond traders are dusting off their tried and true post-crisis playbook after the Federal Reserve’s pivot last month. What they don’t realize is that the game has most likely changed. In an unabashed reach for yield, investors suddenly can’t get enough of the riskiest debt, with the Bloomberg Barclays U.S. Corporate High Yield Bond Index posting a staggering 5.25% total return in the first five weeks of 2019, led by those securities rated in the CCC tier. In the largest CCC borrowing since September, Clear Channel Outdoor Holdings Inc. received orders this week of more than $5 billion for a $2.2 billion deal, allowing it to price its debt to yield 9.25%, compared with whisper talk of about 10%.”

A Friday headline from a separate Bloomberg article: “Corporate Bonds on Fire as Dovish Fed Soothes Investors,” with the opening sentence: “Fear is turning to exuberance in credit markets.” According to Lipper, corporate investment-grade funds enjoyed inflows of $2.668 billion last week, with high-yield funds receiving $3.859 billion. Bloomberg headline: “High-Yield Bond Funds See Biggest Inflow Since July 2016.” This follows the biggest high-yield inflows ($3.28bn) since December 2016 from two weeks ago.

There’s support for the argument that financial conditions have loosened significantly over recent weeks. Prices of corporate bond default protection have declined. After trading as high as 95 bps on December 24th, by Tuesday an index (Markit) of investment-grade credit default swap (CDS) prices had dropped all the way back to 64 (near October levels). Risk premiums have narrowed, especially for high-risk junk bonds. U.S. high-yield spreads (Bloomberg Barclays) traded as wide as 537 bps on (tumultuous) January 3rd. By this Wednesday, they were back down to 400 bps (still significantly above the 300bps from October 3rd).

Bank bond CDS prices have retreated. After spiking to 129 bps on January 3rd, Goldman Sachs CDS was back down to 82 bps on Tuesday (closed the week at 89). For perspective, GS CDS traded at 55 on the final day of July and 59 bps on October 3rd. After trading to 218 bps on January 3rd, Deutsche Bank CDS was back down to 167 bps by the end of January (ended Friday at 189bps)

February 8 – Reuter (Marc Jones): “Investors pumped record high volumes of cash into emerging markets shares and bonds in the past week, Bank of America Merrill Lynch (BAML) said on Friday amid expectations U.S. monetary policy could lead to a weaker U.S. dollar… Investors have piled into emerging market equities and bonds in recent months amid expectations that the U.S. Federal Reserve will not raise interest rates as quickly as previously expected or even no longer tighten its policy.” (more…)

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