Another Accident Waiting to Happen

(Image: Source.)

As the following reports illustrate, there's a wild feeding frenzy taking place in the fixed-income markets, especially those involving the riskiest kinds of securities. Call me a cynic, but how does this not end badly?

"Fixed-Income Pros Fear 'Bond Fund Bubble'"

Seeking safety, inexperienced investors have poured record volumes of assets into bond funds. That's risky—especially if interest rates rise

...

According to TrimTabs Investment Research, investors poured $467.2 billion into bond mutual funds in 2009 and a further $115.8 billion so far this year. By contrast, an average of $43 billion flowed annually into bond funds from 2003 to 2008.

"It's a bond fund bubble," says Marilyn Cohen, chief executive of Envision Capital Management in Los Angeles and author of the book Bonds Now!: Making Money in the New Fixed Income Landscape. Most of these new fund owners are "unsophisticated investors" who are unaware how much rising rates can hurt bonds, she says. (Because institutions and wealthy investors tend to buy securities directly, mutual fund customers tend to be retail investors.) "If we get a big spike in rates, there will be a mass panic," Cohen says.

"Junk Bond Sales Set Record as Investors Waiver: Credit Markets" (Bloomberg)

Companies sold $33.7 billion of junk bonds in April, a record for the month, with borrowers rushing to issue debt before investors pull back from the riskiest securities as governments struggle to manage their deficits.

High-yield, high-risk offerings were the most since 2006, when $12.9 billion was sold, data compiled by Bloomberg show. Moody’s Investors Service says issuance may rise 10 percent this year, while investment-grade drops 7 percent. OnCure Holdings Inc., a manager of radiation oncology treatment centers, and American Petroleum Tankers LLC, an affiliate of Blackstone Group LP, are among companies planning to sell junk bonds.

While issuance soars and cash streams into the market, cracks are developing. Yields on speculative-grade debt rose last week relative to government bonds for the first time since the period ended Feb. 26, according to Bank of America Merrill Lynch Index data. The rise underscores concern that Europe’s growing fiscal crisis and an investigation into Goldman Sachs Group Inc. may slow the economy.

"Junk Bonds Grab Record Share as Yields Tumble: Credit Markets" (Businessweek)

Junk bonds are making up the biggest share of corporate debt sales on record as investors wagering on an economic rebound snap up securities from even first-time issuers.

Global high-yield bond sales reached $91.7 billion this year, or 12 percent of total issuance, almost double last year’s share, according to data compiled by Bloomberg. Yields on the debt fell to within 5.83 percentage points of Treasuries this week, about the lowest since December 2007 and down from 6.66 percentage points at the end of 2009, Bank of America Merrill Lynch’s Global High Yield Index shows.

Economists are boosting growth forecasts this year, and borrowing costs have fallen to pre-credit crisis levels, reducing default risks. Radiation Therapy Services Inc., the Fort Myers, Florida-based operator of cancer-treatment centers, plans to raise $310 million in its inaugural bond offering, while American Residential Services LLC is selling its first notes in 13 years, Bloomberg data show.

“Most of the major concerns seem to be gone,” said James Lee, a fixed income analyst at Bethesda, Maryland-based Calvert Asset Management, which manages about $15.5 billion. “It’s a self-fulfilling cycle. Cash is coming into high-yield and high- yield managers are putting cash to work,” helping borrowers rollover their debt, he said.

“Companies are trying to come in before the market dries up,” said Kingman Penniman, president of KDP Investment Advisors, a high-yield research firm in Montpelier, Vermont. “It’s an issuers’ market.”

"Ford Sells Bonds as Junk Rallies for 14th Month: Credit Markets" (Businessweek)

Junk bonds are poised for a 14th straight monthly gain as investors seek riskier assets while interest rates are at record lows. Federal Reserve officials are searching for signs of self- sustaining growth before beginning to exit the most aggressive monetary policy in history. That’s helping borrowers including Ford, the only one of the three largest U.S. automakers to avoid bankruptcy, to sell a record $70.1 billion of high-yield bonds this year, Bloomberg data show.

“The health of the high-yield market is very strong,” said Ann Benjamin, a money manager who helps oversee $7 billion in high-yield debt for Neuberger Berman LLC in Chicago. “The Fed has a zero interest-rate policy that is forcing investors into areas where they can collect a reasonable spread over Treasuries.”

"Junk Bond Issuers Increase Dividend Deals, S&P Says" (Bloomberg)

Companies may increase borrowing to pay shareholder dividends in a record year for junk bonds, Standard & Poor's said.

Western European firms sold about 11.7 billion euros ($15.8 billion) of high-yield bonds this year, compared with 36.7 billion euros in all of 2009, according to S&P. Among borrowers, British budget clothing retailer Matalan Ltd., raised 300 million pounds ($461 million) of loans and 225 million pounds of bonds, part of which were used for a shareholder payout.

"We are starting to see the proceeds of high-yield issues being channeled to shareholders as dividends, something that is less-welcome from a credit perspective, reminiscent of the leveraged finance market back in 2007," analysts led by Taron Wade wrote in a report released today.

Companies owned by LBO firms in 2007 issued a record 6.1 billion euros of loans in the first half to pay dividends to shareholders, data compiled by Fitch Ratings show.

Private-equity firms "essentially decreased the risk of their portfolio equity investments, boosting their near-term equity returns at the expense of the credit quality of the companies themselves," according to S&P.

"Junk Has Never Looked so Good" (Financial Times)

The high-yield, or “junk” bond markets have never been in better fundamental or technical shape – and currently offer the best risk/reward trade to be found anywhere, believes Thomas Becket, chief investment officer at PSigma Investment Management.

“Corporate bonds were the ‘hot’ trade of 2009 and the huge interest in these markets has, amazingly, driven the borrowing costs of some high quality companies below those of governments – offering no further value,” he says.

“But yields on junk bonds are much more attractive and there remains the potential for capital gains in the years ahead as the pace of corporate defaults slows.”

Mr Becket says that rating agency projections for ongoing defaults are now overly bearish, having been far too bullish when markets were set to suffer between 2007 to 2009. He expects a high-yield default rate of only about 2 per cent in 2010.

"Rally Has Junk Trading at Close to Face Value" (Financial Times)

Prices of junk bonds have rallied so strongly over the past year that a key market benchmark suggests that they are collectively trading at near 100 per cent of face value, a level not seen since before the credit crisis took hold in 2007.

US junk bond prices, measured in a Bank of America Merrill Lynch index, last week reached a price of 99.55, the closest it has been to par – that is 100 per cent of face value – since June 2007.

That marks a sharp recovery in investor confidence in junk bonds – the borrowings from companies below investment grade – from a nadir struck on December 12, 2008, when the index hit a record low of 54.78.

“The return close to par is symbolic,” said Martin Fridson, chief executive of Fridson Investment Advisors, which specialises in high-yield bonds.

“With the strengthening of the US economy and signs accumulating of revival in consumer demand, money is coming out of money market funds where yields are abysmally low, and going into high-yield bonds.

“Investors wouldn’t do that if they did not have confidence these companies would repay them.”

Comments

[Things Do Not Compute]

Sunday, May 2, 2010

Things Do Not Compute

http://tinyurl.com/2as3l3t

[Small Town Gal]

I wonder. "Unsophisticated" investors are generally told that bonds and stocks move against one another, and typically that rising interest rates hurt stocks because the return on savings (an opportunity cost use of investment funds) is improved.

If you have a "balanced" fund with stocks and bonds that are supposed to counter each other as a hedge to some extent, and you expect that the stock market is going to take a dive, it sounds pretty reasonable among the stupid menu of choices available to someone with a 401k to go into bonds.

The problem is, some things cause both bonds and stocks to take a dive.

Unsophisticated little me. I'm sitting in money market, and have been for a long time. I'm missing the run up. I'm getting zero interest. I think it is the best option available to me among those offered. THAT says something.

Whose idea was this 401k crap again? Why are the people at the bottom of the working class taking the market risk rather than the corporations that used to provide pensions again? OH, right - now I remember.

[robert]

Things Do Not Compute I hope people check your link and stay long enough to listen to Jimmy. Wise words but $2M in debt? How does he sleep? Insane. If there are as many "Jimmy's" out there as I suspect it's no wonder the pharmaceutical companies are doing a roaring business separating people from reality.

[Things Do Not Compute]

Main stream media plasters your mind with the the 401 mass marketing campaign..they also forgot to tell you about this:

The largest anti-Wall Street rally since the credit crunch has taken place in New York. Thousands of workers and trade union leaders marched in anger over lost jobs and ruined lives, demanding answers from the source of the trouble – the banks.

http://tinyurl.com/27cylyk

[roger]

To big to fail, change that to :
TO BIG TO SUCCEED.
Success is sweet, total success equals "DEAD END'

[jim]

Gotta ask. what in the world is going on in this picture? what is that?

[roger]

JIM: CHECK THE LINK.BOTTOM RIGHT SIDE OF THE PICTURE
(Image: Source.)

[buzzsaw99]

I'm so unsophisticated that I have ignored the experts for the last 20 years. The only reason they scream "bond bubble" is because they can't steal it if it's sitting in Ts.

[buzzsaw99]

May 3 (Bloomberg) — Banks are increasing purchases of U.S. government securities to pump up profits while lending to businesses languishes near the lowest levels since credit markets started to freeze almost three years ago...

Watch what they do, not what they say.

[ykw]

it is junk; it is a bubble. that's the game, getting in and getting out, until demographic recognition.

The american enterprise system is addicted/tied to slave sub-economies, through breeding, which the Internet has revealed, and as the children of the latter abandon the system, first as individuals, and then in a flood, the former increasingly replaces soft power with hard power, and increases physical and capital control, exponentially increasing symptoms of failure, applying oxygen to the fire, and paying itself through taxation to respond. The net result is climbing debt, which can never be repaid, because the system is bankrupt; it provides no viable path to the future.

The universe and the planet are not stupid, disinterested objects placed here for empire exploitation (even the most vacuous MBA proposal begins with an analysis of environmental threats and opportunities). Both are equipped with limit switches that activate automatic rebalancing mechanisms inherent to their structure in a feedback loop, when replicative growth expunges growth in diversity. For every force, there is an opposing force.

The limit switches spread relative to diversity on the positive feedback side. Enterprise architects work in the dark, just beyond the reach of light, not to be secretive, but because that is where all the action is, on the margin. It only takes a 6% change in behavior across the NPV window to replace an empire, and the Internet has produced change well in excess of that amount, over the required time period. The new motor has already been installed, and the engineers are starting to hook up to it, to build out the circuits required for general populations.

Now, it’s a race to 2012, and the best teams are building virtual economies across artificial nation/state boundaries. The more the latter resist, the more the former grow, and the quicker the latter liquidate. The platform is moving forward, and the nonperforming assets are falling off the back end, being recycled into components, and brought to the leading edge, as materials for bridge construction. As a result, legacy investments are increasingly crowding the fulcrum point.

When the earth, sun, and galaxy line up, you want those asteroids to directly feed the sun in a stable equilibrium (it’s never been done). You do not want the universe to see a planetary imbalance beyond the limit switch, which will create a planetary magnet (the usual). The more durable species are always prepared for large, rapid changes in the environment, when the superwave changes half-cycles, because DNA keeps a record, while humans find themselves in a system that efficiently throws out everything that is not needed today, to maximize “profit” by the quarter.

Invading Iraq was not about SH or WMD; it was about artificially limiting oil supply. Canada, for example, was warned not to become dependent on shale production, which requires a 65+/barrel price, when the real “unadjusted” price is less than $30. The old system is now in a catch-22. It is dependent on oil at an increasingly irrational price, when the planet is demanding a sustainable replacement of quantum proportion, and natural reduction in the acceleration of oil consumption, with demographic deceleration, is flooding the market, without Iraq oil, while they are preaching peak oil to maintain the misdirection.

It’s always darkest before the light. The trick is to get out of the cave and across the bridge before the sun comes up and the planet moves the false-work out from under the cave, which requires an investment in the future at the expense of the present. The entire education system is a sunk cost, because it feeds individuals to the debt manufacturing machine. Park the car, turn off the tv, and walk to the library.

Service to others is the best cure for fear, which is why gravity economies encourage self-absorption through individual competition. Employ gravity; don’t fight it. A little calculus to measure the slope.

[ForWhat]

May 3 - Reporting Food Lines. 1st time I saw that.

[Alan]

where's the transparency we were promised?

The White House, Federal Reserve and Wall Street lobbyists are kicking up their opposition to an amendment to audit the Fed as a Senate vote approaches, Sen. Bernie Sanders (I-Vt.), the lead sponsor of the measure, said on Monday.

http://tinyurl.com/22l9wn7

[Alan]

May 3, 2010

Ron Paul and Alan Grayson: Audit the Fed!

http://tinyurl.com/2ezprwa

[Paula]

"Too big to fall" is an interesting concept. I received similar information via my stock newsletter provided by bullrally.com. The bigger companies are really starting to outgrow themselves to the point where they have no where else to go... really interesting way of looking at a company, but you have to ask yourself, "How much is too much?"

[clayton]

I have heard that Zimbabway (Do not know if it is spelled right) had hyperinflation of such magnitude that a 2 dollar note (their currency) before the inflation was worth like one nonillion ( 1 followed by 27 0s) 2 dollor notes after the inflation. In other words, 2 nonillion dollars would by the same loaf of bread for 2 dollars. That is how bad the currency devalued. Is this likely more or less in America?