Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Thanks to Fed, Bubble Builds in Junk Bonds

By

And we all know how bubbles end.

PrintPRINT
The Fed's misguided policies haven't done a thing for small businesses, the unemployment rate, or the real economy in general but they have induced a mad dash for yield in junk bonds, easily in a bubble state right now.

Byran Keogh writing for Bloomberg says Fed-Induced Rally Makes Riskiest Debt Priciest:

The lowest-rated junk bonds are the most expensive corporate debt following a Federal Reserve-induced rally in high-risk assets, adding to concern fixed-income securities are overvalued.

The extra yield investors demand to hold global bonds rated CCC or lower instead of government debt is about 10.1 percentage points, or 3.4 percentage points narrower than the average over the past 12 years, according to Bank of America Merrill Lynch index data. Debt with B ratings is the only other part of the market trading tighter than its historical average.

The rally in the lowest-rated company bonds has sparked a surge in issuance. MGM Resorts International (MGM), the biggest casino operator on the Las Vegas Strip, Energy Future Holdings Corp. and other companies have sold $6.5 billion of bonds this month rated CCC+ or lower by Standard & Poor's or Caa1 or lower by Moody's Investors Service, data compiled by Bloomberg show.

Goldman Sachs plans to sell $1.3 billion of 50-year debt at a 6.125% yield as soon as today, according to a person familiar with the transaction. The offering may include bonds with a face value of $25 that can't be called for five years, the person said.

The cost of protecting bonds from default in the US held near the lowest level since May. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.1 basis point to a mid-price of 93.5 basis points as of 12:21 p.m. in New York, according to index administrator Markit Group Ltd.

Goldman Sachs said bonds rated CCC+ and lower by S&P or Caa1 by Moody's were "expensive" given expectations for economic growth, and recommended clients buy higher-ranked company bonds instead. John Lipsky, the number-two official at the International Monetary Fund, said last month that global economic growth in the second half of the year will fall short of the fund's forecast of 3.75% on an annualized basis.

"You don't want to stand in the way of the search for yield," said Alberto Gallo, a global credit strategist at Goldman Sachs in New York. "But on the other hand it is a very volatile part of the market. And it can be particularly sensitive to a further slowdown in the economy."

Yields on US investment-grade debt fell to a record low of 3.55% this month, the lowest borrowing cost on record in data going back to October 1986, according to Bank of America Merrill Lynch index data. For CCC bonds and lower, yields dropped to 11.63% yesterday, the lowest level since November 2007, the data show.


We Know How Bubbles End


As long as there's a strong bid for junk, the stock market is unlikely to crack hard. Yet, we know how bubbles end.

The Greenspan Fed ignored the dot-com bubble, even encouraged it because of misguided Y2K fears and belief in productivity miracles. When that bubble burst, the Fed promptly embarked on creating a second, far bigger bubble in housing and debt.

Now the Fed is actively promoting still more bubbles as a solution to god knows what, because the Fed's policies aren't helping the real economy one iota.

In fact, the Fed's policies are helping neither the real nor unreal economies unless you consider creating another opportunity for Goldman Sachs (GS) and select hedge funds to short at the opportune time, appropriate "help."

Fed Uncertainty Principle in Action


Long-time readers will quickly spot the Fed's actions as Fed Uncertainty Principle Corollary Number Three: "Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem."



< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE