This page has been archived and commenting is disabled.

Dear Japanese Pensioners: You Are The New Proud Owners Of Global Junk Bonds

Tyler Durden's picture




 

With leverage rapidly rising while credit spreads approach record lows, high-yield bond markets have long since lost any sense of sanity with regard to forward-discounting... but that hasn't stopped the world's biggest bond managers (and now Japan's pension fund GPIF because as they say "now they have a chance to chase higher returns without taking on much risk") from diving in while the water is warm. With the smell of risk essentially removed from any and every market, why not pile into the riskiest credits, gain some extra yield (for free) - what could go wrong?

As the WSJ reports, among the 10 largest U.S. bond funds at the end of 2013, the four with the fastest growth in assets since 2008 held an average 20% exposure to junk bonds and the massive and always controversially-political GPIF has decided that selling bonds when they lose thir investment grade rating means a big loss of potential to profit and despite expectations for wider spreads, has decided to increase its exposure to BB or lower-rated bonds. Market, meet bag-holder... The Japanese Pensioner.

 

As we have noted before, credit no longer follows fundamentals...

 

Japan's Pension fund is getting set to load up on junk...

GPIF only investing in overseas debt rated investment-grade reduces chances to gain higher returns, fund official says in minutes of March 27 investment-committee meeting released today.

 

GPIF official responding to question from investment-committee member on why fund has decided to buy bonds rated BB or lower

 

GPIF official: Fund’s external managers often say that even if a security is downgraded to BB or lower, some regain their BBB rating, so selling them when they lose that rating means a big loss of potential to profit

 

GPIF official also says that until recently the fund had been really strict about investment grades; now they have a chance to chase higher returns without taking on much risk by diversifying their assets, and so will add high-yielding bonds to asset mix

 

Investment committee member: GPIF results for 5 yrs through Dec. 2013 have been good but environment was supportive as interest rates were low and credit spreads narrowed

 

Rates are more likely to rise than fall in next 5 yrs and credit spreads will probably widen, so GPIF needs a structure that takes into consideration rising interest rates: committee member

And the world's largest bond managers are already bloated... (via WSJ)

A handful of managers have elbowed their way to the top of the bond-fund world by loading up on riskier debt.

Among the 10 largest U.S. bond funds at the end of 2013, the four with the fastest growth in assets since 2008 held an average 20% of their investments in bonds rated below investment grade, also known as junk bonds, according to an analysis by The Wall Street Journal.

 

"Who wants an index fund that yields 2%?" said Jeffrey Gundlach, whose Total Return Bond Fund at DoubleLine Capital LP has $32.1 billion under management, up 10 times from its start four years ago. Mr. Gundlach, in an interview, said investors "want exposure to these high-yield and distressed securities and they've become comfortable with what we're doing."

 

Junk bonds typically offer investors a higher interest rate, or yield, to make up for the risk of default.

 

...

 

Investors in junk corporate bonds like Mr. Lee draw comfort from low corporate default rates below 2%, but the chase for yield has pumped junk-bond prices up to near-record highs, leaving them susceptible to selloffs, analysts said. Mr. Lee said he is watchful for investors to pull out of the market should they sour on bond funds, as they did last summer.

What could go wrong?

"The air goes out of the balloon faster than it goes in, so we might add another percent or two of cash or Treasurys to our portfolio," he said.

 

...

 

"Sales of assets from any of those funds could create contagion effects on the related funds, spreading and amplifying the shock and its market impacts," the Treasury said in a September report on the systemic risk posed by large fund managers.

Well that we guess! And the good old Japanese pensioner will be wearing the "kick me" short when it's all over.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 05/29/2014 - 21:34 | 4808239 Number 156
Number 156's picture

..Because boatloads or radioactive waste is not enough.

Thu, 05/29/2014 - 21:48 | 4808294 I MISS KUDLOW
I MISS KUDLOW's picture

free market capitalism IS the best path to prosperity

Fri, 05/30/2014 - 07:17 | 4808871 Bro of the Sorr...
Bro of the Sorrowful Figure's picture

slightly off topic, but one of the reasons it's so hard to wake people up, especially those who are older, is because so much of their livelihood is staked in the system. for people in their 50s (even 30s and 40s to a lesser extent) and up in the US, waking up means coming to the realization that social security, medicare, medicaid, pensions funds, the wealth you thought you had been accumulating for decades, is going to evaporate in a matter of a few years, at best. add on to the the high likelihood that you got slammed by '08 and are either renting, have very little equity in your home, or had your credit ruined, and i think that on some level people dont accept the truth because it would mean completely breaking their fairytale, leaving only the prospect of hard times ahead. who wouldnt want to stay in the dream for as long as possible.

Thu, 05/29/2014 - 21:34 | 4808240 QQQBall
QQQBall's picture

Diversifying their assets. LOL - whatever

Thu, 05/29/2014 - 21:40 | 4808252 buzzsaw99
buzzsaw99's picture

"Who wants an index fund that yields 2%?

Uh, me. That's why I like Vanguard. Not interested in junk bitchez.

Thu, 05/29/2014 - 21:50 | 4808301 Crawdaddy
Crawdaddy's picture

I hear ya buzz but you know its all junk now.

Thu, 05/29/2014 - 21:39 | 4808254 The Most Intere...
The Most Interesting Frog in the World's picture

They fund pensions in Japan???

Thu, 05/29/2014 - 21:43 | 4808272 disabledvet
disabledvet's picture

to their credit "there is absolutely zero growth in the US economy."

Same holds true for China as well.
"Hard to argue with their returns on treasuries."

http://business.illinois.edu/j-gentry/fin_522/exhibits/16.pdf
says the purpose of the creation of a junk bond market was to "contribute to the literature."

i wonder if it was for fiction or non-fiction?

Thu, 05/29/2014 - 21:43 | 4808274 fonzannoon
fonzannoon's picture

I vaguely remember reading that Japanese Pension funds were buying gold. I guess they switched to junk bonds. Oh well.

Thu, 05/29/2014 - 22:01 | 4808329 Unknown Poster
Unknown Poster's picture

Did you see the 10 year?  Futures 10 Year Note Chart 5 minute

Thu, 05/29/2014 - 22:04 | 4808341 fonzannoon
fonzannoon's picture

yeah man I pretty much don't sleep anymore. So I saw it most of today. Should be interesting to watch the rubberband stretch as yields go lower and stawks go higher until it snaps. 

Thu, 05/29/2014 - 22:15 | 4808372 Unknown Poster
Unknown Poster's picture

It's so damned manipulated nothing makes sense.

Thu, 05/29/2014 - 22:21 | 4808388 fonzannoon
fonzannoon's picture

Think about it this way. The fed (apparently) planned on ending QE one day. So they changed the laws so that banks were forced to own a shitload of UST's for collateral requirements. So you have massive demand there. Then the fed itself is stil buying a shitload of UST's themselves. Throw in pesnion funds and Bill Gross and all of the sudden you have amassive demand and little supply...oh...and -1% GDP. 

Look, I think I have a clue, a vague clue about this stuff. But here are some thoughts from someone I speak to offline who dwarfs me on my best day regarding where we are at and where this prob goes from here.

"its amazing when you think back on it, the bernank blew it, not janet, the bernank.

cb's had their foot fully on the throttle in late 2013 doing the Nikkei dance, and then they nearly blew the EM's up from a combination of a rate rise that they couldnt absorb and commodity price suppression that was destroying EM economies

so then right after janet takes over they just take the foot off the gas completely and all go "lets just sit the next 6 months out and see how everything holds up" the nikkei freezes, FX freezes, DM markets just churn, volume dies, everything gets narrower. Then of course with bonds near their 3% artificial cap, why the fuck not lock that in, so while the Fed is now buying 91% of Treasury issuance, the demand has quintupled from just about everyone to the point that its hard to manipulate that market anymore.

Now the car looks stalled man, they shouldnt have taken their foot off the gas. i honestly have a very hard time imagining how they are going to get bonds up now unless they actually do something that doesnt just surprise the markets, it downright spooks them.

But here we are and unless they can raise rates the future is totally obvious and inevitable: deflation is permanently locked in and all assets that yield anything at all above 1% get bid up to their full potential- that means stawks go to about 2800 (assuming 25x PE which is a 4% yield), USTs go to about 1%, JNK goes to 3% and real estate (the kind you can rent out) goes to about 1% returns.

basically all yields will be bought until there is not an attractive looking return possibility left on this earth. Then we can finally have the big crash the Bernank postponed so skillfully for so long, because then there is nothing left except the great deleveraging phase.

i hope you guys are happy with yourselves. You had 1 shot at raising rates and you blew it. Nothing left to do now but enjoy the ride up to 2800 SPX (still a 50% rally from here, not all bad) and then wait for the inevitable removal of cash from the system, after that they may get another shot at it"

Thu, 05/29/2014 - 22:48 | 4808462 Unknown Poster
Unknown Poster's picture

Good post.

Thu, 05/29/2014 - 22:56 | 4808479 fonzannoon
fonzannoon's picture

don't mind the junks. Most people on here have mentally thrown in the towel a long time ago. I don't blame them. They don't want to think about this stuff anymore. It's exhausting.  Easier to just hope for a crash tomorrow.

Thu, 05/29/2014 - 21:50 | 4808302 user2011
user2011's picture

I don't get it. Japan print it's own money. Why not copy US, HFT and push the japan stock market to the infinity? This is much better than junk bonds. Junk bond will fail but HFT won't... even in vapor volume, the stock market index will be all time high every week. And everyone should be happy.

Thu, 05/29/2014 - 21:54 | 4808312 Unknown Poster
Unknown Poster's picture

Maybe MyRA can become MyJCP.

Thu, 05/29/2014 - 22:01 | 4808325 nmewn
nmewn's picture

Popcorn anyone?

JEN PSAKI: I would argue the president doesn't give himself enough credit for what he's done around the world. And that's how the secretary feels too. We would not be engaged in comprehensive negotiations with Iran, which is where the program is stalled, and is rolling back, if it were not for the role of the United States, along with the P-5 +1 partners certainly. In Ukraine, we've been engaged more or as much as any other country in the world in supporting the elections process, supporting the government, and supporting efforts moving forward. Yes, there's more work that needs to be done, the point is we need to continue to stay at it.

REPORTER: Is this a potential mission accomplished statement?

PSAKI: Absolutely not.

MATT LEE: You would argue the president doesn't give himself enough credit, how much credit would you give him?

PSAKI: I would give him more than he has given himself. So would the secretary.

LEE: Like 200 percent credit? For what? Iran negotiations?

PSAKI: I mean...

REPORTER: What specifically are you saying he doesn't get enough credit for?

PSAKI: For engagement in issues like Iran, what we've done on Ukraine. Efforts to dive in and engage in the world.

REPORTER: Russia has still annexed Crimea. Iran, there are ongoing negotiations, but is that the success here that your talking?

PSAKI: We're talking about engagement in the world and taking on tough issues that present themselves, and the United States continues to play a prominent role doing that.

We're not talking about credit due here, we're talking about engaging with a pen & a phone...and engaging with his red crayon for drawing lines and stuff..and and and so there...so, shut up!

(Ok, I just threw that last part in...lol)

Thu, 05/29/2014 - 22:29 | 4808406 tom a taxpayer
Thu, 05/29/2014 - 22:46 | 4808452 The Longest Call
The Longest Call's picture

MyRA coming to a pensoin near you...

https://www.perpetualassets.com/ira

Thu, 05/29/2014 - 22:47 | 4808457 AdvancingTime
AdvancingTime's picture

A mirage is a naturally occurring optical phenomenon in which light rays are bent to produce a displaced image of distant objects. Joining the idea of a mirage and contagion with the reality of collapsing debt forms an interesting subject.

It is important to remember all debts and obligations do not come due at the same time. Also, it must be noted when a bill is not paid or defaults it often starts a long and drawn out legal battle, this collection process that may extend years without harsh consequences. This my friends is the reality of modern life in America and much of the world.

Modern society has become very good at kicking the can down the road and delaying the day of reckoning. Yes, the part where you collect a debt that you are owed can be similar to a mirage that keeps moving away each time you approach it. This means that at some point the return on loaning money is simply not worth the risk! More on this subject in the article below.

http://brucewilds.blogspot.com/2014/05/debt-mirage-always-moving-into-di...

Thu, 05/29/2014 - 23:09 | 4808511 yogibear
yogibear's picture

Japan, 

Supersized your debt and printing just as the PhDs at the US Federal directed.

Now your screwed.  At least you'll have company. The US isn't far behind.

Thu, 05/29/2014 - 23:38 | 4808571 Spungo
Spungo's picture

Invest in rock solid companies like Coca Cola or Kikkoman? Fuck it. Let's buy junk bonds!

Thu, 05/29/2014 - 23:44 | 4808573 yogibear
yogibear's picture

Watch out Japanese citizens the world banksters will pull a Cypress. They'll clean out your bank accounts next. Don't walk to pull your money out, run!

 

Fri, 05/30/2014 - 00:48 | 4808655 Schmuck Raker
Schmuck Raker's picture

..............................................................." Don't worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................worry.".............................................................................................................................................................................................................................................................

Fri, 05/30/2014 - 04:00 | 4808769 russwinter
russwinter's picture

There is more to the story of Ultra-Junk Finance, it is criminogenic. 

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

Do NOT follow this link or you will be banned from the site!