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Equity Market Turmoil Spreading To High Yield Names
While some may think the carnage in stocks is bad, it is really a joke compared to the recent bloodbath in High Yield land, where (leveraged) funds are getting blown out and forced to liquidate high-beta (read: soon to be bankrupt unless they did a covenant lite refi) names en masse. Here is a good summary of the bloodbath happening beneath the surface courtesy of LoanConnector:
"With the turmoil in Europe wreaking havoc on the high yield bond market, the week of May 17 saw the second largest spread widening of 2010. Spreads widened 69bp for the week and 33bp on Thursday alone. When Germany unilaterally announced a ban on naked short-selling, a move that could have major ramifications outside of Germany, the markets went wild. The DJIA plummeted 552 points last week, the VIX index, a popular measure of volatility, jumped to 47 Friday morning, and the 10-year Treasury yield dropped to 3.12% at one point last Friday. High yield funds saw an outflow of $378 million, which added onto the previous week's exodus of $1.69 billion, the largest weekly outflow since 2004. Investors are fleeing to safety, and last week saw the lowest weekly high yield bond volume for 2010 to date at $1.30 billion. With spreads on the rise, issuers are waiting for more favorable conditions before testing the markets. Four out of last week's five new issues that priced were LBO deals - transactions that had to close and were therefore not extremely price-sensitive. May has already seen six high yield deals postponed, and this morning's announcement by Allegiant Travel Company upped that number to seven. Many of last week's new issuance traded down, and it is expected that a few more deals will be postponed this week."
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You mean they lied to us about buying in to high yield? Those fukcers!
So Michael Milken was wrong and junk bonds don't always work out?
end of the world as we know it and i feel pretty damn fine
They work alright for the sellers; but buyers are idiots if they expose themselves to losses by buying single name HY; Milken also said the same thing [he is a dirty motherfucker for doing many things, but he did this right]. The best way to buy HY is to buy a HY basket; then you reduce your risk significantly since probability of default enters the game and default in HY baskets of single names which participate in said basket is never high enough for you to incur a loss. Also, you can buy a CDS on a basket and make the trade practically risk free.
we used to call risk free trades market manipulation. we also used to practice laissez-faire during the good times. this market needs a healthy portion of it.
ratava, sorry; i replied to your comment when this was meant to go under exportbanks comment. no, it really is not market manipulation, you dont manipulate anything, you just structure a product which you are buying to minimize the risk.
structure a product you are buying to minimize risk.
i will stick to no free lunch hypothesis, thank you.
Do you consider collision insurance on your car a 'free lunch' too?
It's one thing when asshats like GS are committing 'insurance fraud' by arranging 'swoop and squat' accidents, but there's nothing wrong with a not-so-naked 'short'.
no, there is nothing wrong with an old fashioned short. however, hedging with CDS is nothing but finding a bigger sucker and abusing his informational disadvantage. if you create zero value and take zero risk, you should make zero profit. sorry smartest people in the room, you wasted your college loan on smoke and mirrors.
have you even read what it wrote. you do not commit "ABACUS" nor do you bet that the basket will default and you do not naked short it via a CDS. You own the basket yourself and CDS on that basket is not a naked CDS, but a hedge if your principal trade goes the wrong way. Also, there is no free lunch because a) you are exposed to counterparty risk b)the risk that the basket will have a higher than usual default rate c)yield movements d) currency risk e)liuidity if you want to unwind the trade before its duration.
not if you wrap it up real purty and rely on the legal system to enforce your "luck":
http://www.investopedia.com/articles/trading/08/negative-basis-trades.asp
"Since market dislocations or “credit crunches” create the conditions for a negative basis trade to be possible, it is very important for the holders of this trade to be monitoring the marketplace constantly"
Yeah, "monitoring".
Sooooo a run on any banks today? Wonder how jittery the MMFs are going to be?
I thought all the risk was being guaranteed by the Fed? What the F@*K!
So when there are cheaters in the game and people know it, they decide not to play anymore? = game over..
Well, unless we can close over 1050 June S&P say hello to 1025. After that, its anyone's best guess. We could have a massive currency ntervention by the G20 to slow the slide but in the long run this Bear market will have its way
Only a matter of time until the mass deception in private equity fund valuations comes to light. Portfolios everywhere have been massively overvalued, and this will have terrible impact on pensions and university endowments.
I was reading in the Sunday paper how Syracuse University's endowments have taken a nose dive.
Is there actually 1 stock that doesn't have a "downtrend" these days?
I mentioned the early collapse of this bubble last week. Once confidence is blown in high yield, there's little any one can do but watch the defaults proliferate. It's the ole game of musical chairs as silly investors start worrying that the bonds in their baskets are ready to blow up.
High yield issuance was at an all time record during January to April. Looks like the sellers got their last licks in before the crash.
My theory is that junk bonds (along with secondary equity offers) were used as a substitute for bank credit and commercial paper during the "Green Shoot Spring" of 2009-2010.
Going forward this underscores a key issue: if junk bonds crash and secondary equities are cut off in a declining market, how will debt be rolled forward in corporate land??? Beware of major insolvencies ahead.
The HY market is still overvalued. We are back to too much leverage and looser covenants and protection. Its insane if you think that this HY bull market has been right in the midst of the Euro crisis. I guess we'll never learn.
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