Tag Archives: Bloomberg

Junk Bonds Record in ‘Goldilocks’ Market

29 Mar

From Bloomberg:

Junk bond sales reached a record this month as rising profits and record low Federal Reserve interest rates foster lending and investment to the lowest-rated borrowers.

Companies worldwide issued $38.3 billion of junk bonds this month, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point this month to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show.

This is “an almost ‘Goldilocks’ environment for leveraged credit markets,” JPMorgan Chase & Co. analysts led by Peter Acciavatti, the top-ranked high-yield strategist in Institutional Investor magazine’s annual survey for the past seven years, said in a March 26 report to the bank’s clients.

This is very bad news.

There has been growing concern around the world that the sales of junk bonds prior to the GFC will lead to a junk bond apocalypse in 2012:

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

Now, the ongoing Zero Interest Rate Policy (ZIRP) in the USA, and near zero interest rates in Japan and many other developed nations, has led to a new record in the sales of those same high risk ‘junk bonds’.

In other words, central banks and governments around the world are adding more fuel to the fire.

Everything Falls On Debt Concerns

25 Mar

From Bloomberg:

March 24 – Treasuries, the euro, stocks and commodities slid as a downgrade of Portugal’s debt and weaker- than-forecast demand in a U.S. bond auction added to concern governments will struggle to fund swelling deficits.

Greece “is going to default at some point,” and Europe’s failure to answer that challenge will hurt the common currency, UBS Investment Bank’s London-based deputy head of global economics, Paul Donovan, said in an interview on Bloomberg Radio. “If Europe can’t solve a small problem like this, how on earth is it going to solve the larger problem, which is the euro doesn’t work,” he said.

China Facing ‘Massive’ Bank Bailouts

14 Mar

From Bloomberg:

China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.

In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities.

More on the growing concerns about China’s property bubble and risks to its economy here, and here.

Soros: Euro ‘May Not Survive’

8 Mar

From Bloomberg:

The euro is being “severely tested” and “may not survive” the Greek deficit crisis, billionaire investor George Soros said.

The European currency’s construction is “flawed” because there is “a common central bank, but you don’t have a common treasury,” Soros said on CNN’s “Fareed Zacharia GPS” program.

“The exchange rate is fixed. If a country gets into difficulty, it can’t depreciate its currency, which would be the normal way,” Soros said.

The sovereign debt crisis in the Eurozone is far more serious than Australia’s economic authorities at Treasury and the Reserve Bank are admitting. A collapse of the Euro – and the European Monetary Union – would clearly have huge impacts for the global economy, including Australia.

Barnaby is right.

Greece Now, UK Next

3 Mar

From Bloomberg:

While the eyes of the world focus on Greece’s debt crisis, investors in Edinburgh are busy preparing for the U.K. to be next.

Turcan Connell, which caters to rich families, expects the pound to lose between 20 percent and 30 percent against the dollar once investors turn their sights on Britain as the government sells a record amount of debt. Sterling slid to a 10- month low versus the U.S. currency today.

Alarm bells were ringing in Greece for a long time and when it happened, it happened very quickly,” Haig Bathgate, head of strategy at Turcan Connell, said at the company’s offices in the Scottish capital. “The U.K. is in a similar predicament. It could be hit very hard.”

The Rudd Labor government is currently borrowing more than a billion dollars a week.

And we can’t pay it back.

Rogoff Warns of China Crisis

25 Feb

Former chief economist of the IMF, Ken Rogoff, warns of a regional crisis when the China “bubble” collapses:

China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt-fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Ken Rogoff.

“We would learn just how important China is when that happens. It would cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, he said.

The impacts on Australia – a leading commodity exporter – arising from a collapse in demand from China are obvious.

Rogoff was one of very few economists who predicted the GFC.

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