• 1 hour Airbnb In Acquisition Mode Ahead Of IPO
  • 4 hours Gold Hangs At $1,300 Ahead Of Fed Meeting
  • 6 hours Champagne Sales Slow As European Economic Worries Grow Louder
  • 22 hours Putin Signs “Digital Iron Curtain” Into Law
  • 1 day Russian Metals Magnate Sues U.S. Over Sanctions
  • 1 day Tesla Looks To Jump Into Indian Market
  • 1 day Global Banks Lay Groundwork To Re-Inflate Asset Prices
  • 2 days Homeowners Experiment With Risky New Investment Trend
  • 2 days U.S. Tech Stocks Look Increasingly Vulnerable
  • 2 days De Beers To Expand World’s Most Profitable Diamond Mine
  • 2 days Ford CEO Gets Raise After Massive Layoff Round
  • 3 days Germany’s Flirtation With Recession Could Cripple The Global Economy
  • 3 days Where To Look As Gold Miners Inch Higher
  • 4 days Google Faces Billions In Fines From European Regulators
  • 4 days The Energy Industry Has A Millennial Problem
  • 5 days Russian Banks Scramble For Sanction Loopholes
  • 5 days Gold ETFs Take A Hit After Four-Month Run
  • 6 days European Union Takes Aim At Ten New Tax Havens
  • 6 days Goldman Defends Trillion-Dollar Corporate Buyback Spree
  • 6 days $600 Billion At Risk As Boeing Fallout Continues
The Chatroom Cartel Running Global Bond Markets

The Chatroom Cartel Running Global Bond Markets

Eight major banks have been…

Lending: The Good, Bad, And Ugly

Lending: The Good, Bad, And Ugly

Aristotle said, “The most hated…

  1. Home
  2. Markets
  3. Other

The End Is Near, Part 2: Everyone Piles Into Junk Bonds

Six years into a recovery, stocks at record levels, high-end real estate in the stratosphere and debt levels soaring in virtually every public and private sector. Time to scale back and protect those gains, right? Wrong, apparently, for a depressingly obvious reason: Huge sections of the investing public can't afford to move into cash or even into conservative paper like short-term Treasuries.

Pension funds that are required to generate 8% annual returns, insurance companies that only make money if incoming premiums earn at leas 6%, retirees who need to generate cash on their savings in order to eat, mutual funds that are judged on quarterly returns, hedge funds that have underperformed lately and will see a tidal wave of redemptions if they don't outperform from here on out -- all feel compelled to make even more money this year than last. They therefore have no choice but to roll the dice for big immediate gains. And guess what they're choosing:

Junk bonds take the lead in fixed-income returns

After plunging oil prices sent the U.S. high-yield corporate bond market into a tailspin late last year, the asset class has come back.

High-yield is the best performer in U.S. fixed-income in the year so far, after chalking up positive returns in April to outperform investment-grade and Treasuries.

High-yield debt has returned 3.8% in the year so far, according to the Bank of America Merrill Lynch Global Index System. That compares with 1.7% for investment grade and 1.3% for Treasuries.

The asset class has also outperformed the broader stock market, with the S&P 500 SPX, +0.92% showing total returns of 1.1% in the year so far, according to FactSet data.

"There's just been a desperate demand for yield because rates are so low," said Martin Fridson, chief investment officer of wealth management firm Lehmann Livian Fridson Advisors. "Fears of a rate hike have receded and the expectations have been pushed back to 2016, and high yield has benefited."

In April, the high-yield sector had a positive total return of 1.2%, while investment grade had a negative return of 0.5% and Treasuries a negative return of 0.4%. As of Thursday, high-yield was offering an extra 459 basis point-spread over Treasuries, according to Bank of America Merrill Lynch.

Not surprisingly, high-yield issuance has continued at a healthy clip. U.S. issuers have sold $133.8 billion of debt in 176 deals in the year so far, according to Dealogic. That's up from $126.5 billion in 212 deals in the same period in 2014.

What's depressing about this is the repetition. Since the late 1980s, panicked governments have responded to slowdowns by herding their most vulnerable savers into excessively risky assets and then pulling away the football. And every time the same groups fall for it. Supposedly risk-averse capital flows to the least appropriate borrowers, who satisfy the demand by issuing a tidal wave of crappy paper which blows up in short order.

And then the game begins again. Since this process is so obviously purposeful and clearly doesn't help the individuals who have their nest eggs and pensions depleted by the inevitable busts, the only conclusion is that someone else is getting something out of it. Wonder who that could be?

 

Back to homepage

Leave a comment

Leave a comment