With 10-year treasuries yielding a mere 2.39%, and with 5-year treasuries at an all time low yield of 1.1%, investors have plowed into the riskiest of junk bonds with reckless abandon.
Please consider Bond Distress at 5-Month Low as Junk Rallies
The percentage of corporate bonds considered in distress fell to a five-month low as record sales of high-yield debt and declining borrowing costs convince investors the riskiest companies can pay their lenders.
The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds declined to 290, or 12 percent of the total, the lowest share since April and down from 15.9 percent at the end of August, according to Bank of America Merrill Lynch index data.
Junk-rated borrowers globally sold a record $98.9 billion of bonds last quarter as investors sought higher relative yields, helping the weakest companies shore up their balance sheets. Defaults by high-yield issuers fell to 4 percent last month from 6.2 percent in June, Moody’s Investors Service said yesterday.
At least $13.2 billion of junk bonds have been sold this month, bringing the global total to an all-time high of $263.5 billion, 26 percent higher than the full-year record set in 2009, Bloomberg data show. Junk bond sales in the U.S. have reached $208.9 billion this year, the data show.
“This is obviously a case of too much money chasing too few good bonds,” said Don Ross, who helps oversee $9.5 billion of assets as global strategist for Titanium Asset Management Corp. in Cleveland. “It’s just money changing hands and corporations being the net gainer by being able to issue cheaper and have better balance sheets. In the long run that will help the economy, but holy mackerel, at what cost?”
High-yield spreads in the U.S., which fell yesterday to 613 basis points, are “within shouting distance” of the historical average of 598 basis points, a milestone that doesn’t indicate the market has “run too far too fast,” Martin Fridson, global credit strategist at BNP Paribas Asset Management, said Oct. 6 in an e-mail.
“Investors are being well compensated for risk and talk of a bubble in high-yield bonds is misguided,” Fridson said.
Average Times These Are Not
Saying junk bonds are not in a bubble compared to average times only makes sense if these are average times. They are not.
The one thing Bernanke has managed to do is stimulate risk taking. However, that risk taking in equities and junk bonds will not do a thing for the real economy nor will it create any new jobs.
The proper conclusion is that risk is high and rising. With junk bonds at par, gold soaring to all time highs, and equities priced far beyond perfection, more speculation is the last thing the economy needs.
Yet increased speculation and risk taking is the only think Bernanke has managed to stimulate.
This can’t end well, which by definition means it won’t, but the Monetarist clowns at the Fed don’t see it that way. In the meantime, all that remains to be seen is how big various bubbles get before they pop.
Mike “Mish” Shedlock
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