Leverage Lurches To Post-Crisis Highs

Tyler Durden's picture

As we noted yesterday, the credit bubble is in full swing as high-yield covenant protections hit a new low in January. At the same time, new issue premia in high yield credit has remained extremely low (meaning demand is high) - even as leverage (measured in a number of ways) surges to post-financial-crisis highs. With low yields and technical demand so abundant, firms appear to be leveraging-up in favor of shareholders. But, as is always the case, there is a limit to just how much leverage can be piled on before credit spreads 'snap' and raise the cost of capital - hindering the equity price. Finally, for the 'cash on the balance sheet' advocates, US firms' Cash/Debt is its lowest (worst) since pre-crisis. Banks continue to delever, sovereigns relever, and non-financials taking their lead - this didn't end well last time... and this time, exuberance and positioning is very heavy.

Investment Grade Leverage in the US is rising rapidly - but its the sovereigns that are leading the post-crisis releveraging...

 

And High-Yield leverage is also surging... and for all those 'cash on the sidelines' hopers, Cash/Debt is now at its lowest (worst) since before the crisis...

as Global banks slowly but surely delever...

Though demand remains high for bond issuance...

 

But where is all that leverage going? Straight to the shareholders...

But those shareholders better hope that nothing goes wrong - as they are all in complacent...

 

 

and we have seen these 'releveragings' try and drag stocks higher before - with disconnects between HY credit (being priced for that higher leverage) and stocks...

but soon enough the realization comes as credit traders shift from picking winners to avoiding losers...

The credit cycle is called a cycle for a reason - and now firms are in the releveraging mode, that systemic demand for credit may just become a little more idiosyncratic and remove a leg from the equity market's stool of exuberance.

 

Charts: Bloomberg and Morgan Stanley