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Credit Mania Update – The Chase for CCC-Rated Bonds

Tyler Durden's picture




 

Despite the plethora of talking heads proclaiming credit markets as awesomely supportive of stocks - High-Yield bond spreads are flashing red...

 

 

But that's not stopping investors piling into the worst of the worst. As Liberty Blitzkrieg's Mike Krieger notes, in an all too reminiscent scene from 2007 (MBIA CDS traded 11bps at one point then remember), investors have been buying up bonds with a triple-C-rating en masse.

 

 

I hadn’t focused on the latest bout of credit market frothiness until the last couple of months, as investor activity has become so preposterous and disturbing that I simply couldn’t ignore it any longer. Before reading the rest of this post, I suggest catching up on two pieces I highlighted recently on the topic, which should help set the stage:

Is the Credit Bubble Popping? Carlyle Group Warns on Frothiness and Junk Bond Deals Get Pulled

Guest Post: Is There a Massive High Yield Credit Bubble?

Moving along to today’s piece from the Wall Street Journal, which focuses on investors’ insatiable appetite for CCC-rated bonds. We learn that: 

Large investors are rushing into the riskiest corporate bonds, frustrated by low interest rates on safer investments and convinced that even companies with shaky finances are in little danger of default.

One sign of that rush: Investors have been buying up corporate bonds with a triple-C rating, a grade that analysts and investors consider highly speculative.

 

That buying is driving up prices on those bonds and pushing down their yields, which this month fell to 8.187% on a closely watched Bank of America Merrill Lynch index—the lowest level on record.

 

This embrace of risky bonds and the retreat from risky stocks reflect a world where interest rates are staying much lower, much longer than most had expected, some investors say. “What we’re seeing is the continued search for yield,” says Matthew Rubin, director of investment strategy at Neuberger Berman, which oversees $247 billion.

 

The 12-month trailing default rate from low-rated corporate borrowers edged up to 1.7% in April, from a six-year low of 1.57% in March, according to Standard & Poor’s Ratings Services.

 

The yield gap between junk bonds and U.S. government debt—a measure of the premium investors receive for taking on the risk of junk bonds—has narrowed. On triple-C-rated debt, that gap recently hit 6.97 percentage points, the lowest since November 2007. The all-time low of 4.14 percentage points was hit earlier that year.

A little too many comparisons to 2007 for my taste.

Just understand that your pension is going to be stuffed completely full like a Thanksgiving Turkey with the most toxic financial shit you can imagine by the time this thing blows sky-high.

Muppets will lose, as always.

Full article here.

 

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Tue, 05/20/2014 - 15:29 | 4778513 LawsofPhysics
LawsofPhysics's picture

Once again, the tylers make it very clear that somebody's lying...

 

Place you bets...

Tue, 05/20/2014 - 15:31 | 4778519 Hippocratic Oaf
Hippocratic Oaf's picture

Corporates are way over-priced.

The yield chase has been on for way too long.

Spreads are widening a bit, but not much.

Look out below...........

Tue, 05/20/2014 - 16:08 | 4778632 BrosephStiglitz
BrosephStiglitz's picture

Agreed.

Tue, 05/20/2014 - 17:23 | 4778636 BrosephStiglitz
BrosephStiglitz's picture

.

Tue, 05/20/2014 - 15:47 | 4778572 BandGap
BandGap's picture

I cannot see that this can be referred to as "lying" anymore. It is a blatant, weak, attempt to steal as much as possible before the explosion/implosion. Fucking just saying it's lying doesn't do this fucking scam justice.

Tue, 05/20/2014 - 16:26 | 4778697 LawsofPhysics
LawsofPhysics's picture

Call it what it really is, fraud on a massive scale the likes of which have never been seen before.

The endgame and bloodletting will be proportional...

hedge accordingly.

Tue, 05/20/2014 - 15:29 | 4778514 AccreditedEYE
AccreditedEYE's picture

3:30 approaches... on a TUESDAY! Prepare to Buy The F-ing Dip!!!

Tue, 05/20/2014 - 15:34 | 4778532 mkhs
mkhs's picture

Mondays are the new Tuesday.

Tue, 05/20/2014 - 15:38 | 4778545 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

3:30 came at 2, 3, and now at 3:30. This was about the most relentless defense of the markets that I've seen. NASDAQ E mini 100 on its way to finishing positive for the day if you can believe. 

Tue, 05/20/2014 - 15:44 | 4778563 FieldingMellish
FieldingMellish's picture

Set your gold plated Swiss watch by it.

Tue, 05/20/2014 - 15:33 | 4778526 Sudden Debt
Sudden Debt's picture

well... if a stock has the symbols TWTR people flock in by the thousands because they think its twitter...

Tue, 05/20/2014 - 15:34 | 4778530 fonzannoon
fonzannoon's picture

trillions of dollars of baby boomer retirement funds searching for yield 5 years into zirp. 

Tue, 05/20/2014 - 15:35 | 4778536 Sudden Debt
Sudden Debt's picture

the smart money already moved it's money to the caymans

Tue, 05/20/2014 - 19:05 | 4779121 Slave
Slave's picture

And their asses to the Caymans...

Tue, 05/20/2014 - 15:38 | 4778547 centerline
centerline's picture

Left without a choice.  Risk has been removed from the criteria for investment.  Capital is being cornered.  Scary.

Tue, 05/20/2014 - 17:31 | 4778919 DeadFred
DeadFred's picture

If you think of it this is really a good investment. When treasuries, bunds and all other bonds go belly up at least you paid less for these. Then again you could have bought gold and silver.

Tue, 05/20/2014 - 15:34 | 4778533 Sudden Debt
Sudden Debt's picture

does anybody notice how silver keeps being perfectly flat whenever the us markets opens these last few weeks? It just doesn't move anymore.

Tue, 05/20/2014 - 15:34 | 4778534 pound the vix
pound the vix's picture

Obviously the smart money is in stocks

Tue, 05/20/2014 - 15:41 | 4778552 ptoemmes
ptoemmes's picture

Maybe bond ratings are like bra sizes..

Tue, 05/20/2014 - 15:52 | 4778585 GooseShtepping Moron
GooseShtepping Moron's picture

As in, "Still incomprehensible to me after all these years?" -- I think you've got it.

Tue, 05/20/2014 - 16:10 | 4778648 Emergency Ward
Emergency Ward's picture

Where's the DDD's ?!?  Ha ha...

Tue, 05/20/2014 - 15:44 | 4778562 Cattender
Cattender's picture

the stock market will NEVER go down.... ever. (it's DIFFERENT this time)

Tue, 05/20/2014 - 15:45 | 4778565 FieldingMellish
FieldingMellish's picture

Total unrigginess as VIX is down more than the SPoo.

Tue, 05/20/2014 - 15:47 | 4778571 Rainman
Rainman's picture

CalPers expects a 5.35% return from these junk bond piggies. As usual, this won't end well .

Tue, 05/20/2014 - 15:56 | 4778602 Emergency Ward
Emergency Ward's picture

I find a CCC-rated maturity 2097 [100-year Make-Whole bond issued in 1997] JC Penney coupon 7.6% with a yield of 9.5%.  Gotta be a deal.....is this for real?, I ask myself....

Or how about some Sears Roebuck or Arch Coal with 12-13% yields?

Tue, 05/20/2014 - 15:49 | 4778579 fonzannoon
fonzannoon's picture

lets say junk bonds start blowing up. my guess is that money flows into ust's and the dow. that is mind boggling.

Tue, 05/20/2014 - 15:58 | 4778614 russwinter
russwinter's picture

Criminal networks: There's More to the Story Of Ultra-Junk Bonds:

http://winteractionables.com/?p=11085

 

Tue, 05/20/2014 - 16:08 | 4778640 Cthonic
Cthonic's picture

Who wants to be my A I G ?

Tue, 05/20/2014 - 20:09 | 4779356 Spungo
Spungo's picture

I'll never understand why people buy bonds. Didn't we learn anything from 2008? The credit ratings are absolutely meaningless. As Schiff pointed out in his mortgage bankers speech (gread video), something like 2/3 of all subprime mortgages were rated AAA. These were loans given to people with no income. wtf is a CCC loan? Is that a loan to someone who died several years ago? Is it a loan to someone who doesn't exist? I'm guessing the bonds between AAA and CCC are better than lending to a dead guy but not quite as good as lending to an unemployed guy. Maybe BBB is a loan to an unemployed guy with no legs.

Tue, 05/20/2014 - 20:10 | 4779363 Spungo
Spungo's picture

omg million dollar idea. If prostitution were legal, you could use sex to secure the loan and get lower interest rates. If I stop paying the loan, you get to fuck me, and that's why the interest rate is slightly lower than an unsecured loan.

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