Corporate Leverage Goes Option ARM As Floating Rate Debt Sees Largest Fund Flow In History
While Zero Hedge already noted that fund flows into bond funds and out of equity funds have once again resumed (a fact that was barely mentioned if at all on CNBC, contrary to the day-long segment on fund flows dedicated to the first equity inflow after 33 weeks of outflows), digging through the actual composition of debt receiving inflows reveals some curious details. EPFR reports a very disturbing development, namely that in the last week, Floating Rate debt saw $859 million inflows which was the largest inflow by dollar amount in history. Implicitly what this means is that bankers are currently pitching another massive round of refi deal to companies (particularly those that are past the non-call window, which in 2011 would mean quite a few of them), one which seeks to replace fixed debt with floating, or debt based on a Libor floor and a fixed margin. And for thousands of corporate treasurers, at a time when the Fed is guaranteeing ZIRP for the next 3 years at least, this is a slam dunk decision: after all why pay even a modest fixed interest when one can part with a modest refi fee, and still pay a fraction of the current interest expense. To some this may seem familiar: after all this is precisely the last push in refis in the housing bubble when everyone was jumping into an adjustable rate mortgage, which had a floating rate in its first 5 or so years. Are we starting to see the Option ARM wave in corporate refinancings? And if so, is this the same top tick indicator in the credit market currently that it was in the housing bubble of 4 years ago? The answer: it all depends on how much longer Ben Bernanke can succeed in defying gravity and the rules of the free market, courtesy of his ponzified central-planning artificial economy. And just like with Paolo Pellegrini, the one who can time the flip properly will be able to retire shortly thereafter.
Some comments from Bank of America:
Inflows to HY bond mutual funds were steady in the second week of 2011, $726 million vs. $864 million in the prior week, which is the sixth consecutive weekly inflow according to EPFR data. Market observations indicated a firm number as HY cash bonds gained 1/8 to 1/4 pts on most trading days this week while CDX HY15 increased over ½ pt week-over-week. Daily reporting funds showed inflows in every trading session and net flows were positive from both institutional and retail investors. Non-US domiciled HY funds saw strong inflows as well, $482 million or 0.9% of assets. Importantly, floating rate funds saw its largest inflow by dollar amount, $859 million or 2.6% of assets, which is also the 28th consecutive weekly inflow.