The Phaserl


Insanity, Oddities and Dark Clouds in Credit-Land

by Pater Tenebrarum, Acting Man:

Insanity Rules

Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn’t matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more.

A huge mountain of interest-free risk has accumulated in investor portfolios and on bank balance sheets. Globally, more than $13 trillion in sovereign bonds trade at negative yields to maturity. In spite of soaring defaults, junk bond yields have collapsed again as well. In short, insanity rules in the bond markets.

A recent article in the FT informs us of “a wave of foreign demand for US corporate debt”:

Record-low interest rates are no barrier for US companies finding buyers for their debt thanks to a relentless global quest for fixed returns that shows little sign of easing. The pace of US corporate debt sales — which has not been fast enough to quench investor demand — is expected to continue unabated driven by foreign buyers in a world where roughly $13tn of sovereign and corporate debt trades in negative territory.
“It is a low return world,” says Ed Campbell, a portfolio manager with asset manager QMA. “You don’t have a lot of asset classes that are attractive and there is a flight to quality where the US is outperforming.”
More than $2.3tn of dollar-denominated debt has been issued by companies and banks since the year began, including three of the ten largest corporate bond sales on record
, Dealogic data show.

(emphasis added)

This not only shows that “investors” (we use the term loosely) are insane, it also happens to be a contrary indicator. Foreign buying of US assets very often reaches record highs prior to major financial accidents. Is this really a “flight to quality?” Corporate defaults are currently at the highest level since 2009, with US defaults clearly leading the pack:

Corporate defaults by region. Foreign investors are rushing into US corporate debt because – as one observer put it – “A yield of 2.83 per cent can fall a lot more than a [yield of] 0.71 per cent.” What more reason could one possibly need?

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