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Corporate Bond Bubble Comes Unglued at the Bottom, Investors Begin to Bleed

testosteronepit's picture




 

Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter

Just about every aspect of the US credit bubble is setting new records these days. Now corporate bond sales did it: they punched through the $1.5-trillion mark, beating the full-year record of $1.49 trillion in 2013. It’s a feeding frenzy – corporations and Wall Street feeding on cheap investor money before rates go up.

On Tuesday, Amazon went back to the till to take $6 billion in new money from investors via another bond sale, after having sold $3 billion two years ago. Debt is piling up. Excluding what it owes its suppliers, Amazon ended 2011 with $2.6 billion in debt; by last quarter, the pile had grown to $8.4 billion. This quarter, an additional $6 billion will be piled on top. Profit-challenged Amazon needs the money: last quarter, it booked the largest operating loss in its history.

On Monday, it was Medtronic that went to the till for $17 billion in new money, the largest bond sale this year. It needs the money not to expand its research facilities or operations or anything else productive, but to buy surgical gear maker Covidien. The deal beat the other mega deals this year, such as Alibaba’s $8 billion bond offering two weeks ago or GE’s $13.2 billion offering and Verizon’s $14.8 billion offering earlier this year.

Like many of its corporate brethren, Verizon is already drowning in debt, after a borrowing binge that included the record-breaking $49 billion bond offering last year to help pay for its acquisition of Vodafone’s share of Verizon Wireless.

Amazon’s deal pushed investment-grade bond sales so far this year to $1.174 trillion. Junk bonds have been red-hot too. The current sales of $344 billion are just a notch from the 2013 record of $348 billion, according to Bloomberg. That record is likely to fall shortly. In total so far this year, corporations have collected $1.518 trillion in new money from investors via bond sales alone, the most ever.

Companies are taking advantage of enticingly low borrowing costs while they still can. And they don’t waste their energy investing the proceeds in productive activities, such as capital expenditures or expansion plans. Instead, they’re using the money to buy back their own shares, pay dividends, and acquire other companies.

Timing couldn’t be better. In this super-expensive market, they’re overpaying for their own shares; and they’re overpaying for other companies by adding huge premiums to already inflated stock prices. Wall Street, which gets fat from the fees, provides the requisite hoopla.

It’s a perfect use of debt. Instead of creating something that will generate an income stream with which to service and pay off the debt, corporations are blowing the proceeds. This works wonderfully as long as ever cheaper new debt is available to service and pay off old debt.

For investors, it has been a great deal too, thanks to the Fed’s interest rate repression and QE, and its jawboning that markets so love because it signals to everyone in which direction to run all at the same time, screaming, “Don’t fight the Fed.” The simultaneous buying inflates prices and represses yields. Bond investors have been rewarded at every twist and turn of the yield repression saga not with adequate yields, but with higher prices for their bonds.

New money has been pouring into corporate investment-grade bond funds for 24 weeks in a row, according to Lipper. But junk-bond funds have had a more mixed experience recently as investors are beginning to get cold feet.

Prices of junk bonds (rated BB or lower) have been falling from record levels in June, and the yield has zigzagged up nervously from 4.2% in June to 4.98% on Tuesday. Among junk bonds rated CCC or lower, the underbelly of over-indebted corporate America, outright ugliness is starting to spread: the yield jumped from 7.94% in June to 10.69% on Tuesday, the highest yield since December 2012, higher even than during the nerve-racking taper tantrum last year.

The swoon in junk bonds is in part due to the rout in the oil and gas sector. The fracking revolution was largely funded with debt, based on a scenario of ever increasing oil prices. But oil prices have plunged nearly 40% since June. And the bloodletting is spreading [read… Saudi Arabia Declares Oil War on US Fracking, hits Railroads, Tank-Car Makers, Canada, Russia; Sinks Venezuela].

Yield-desperate investors are beginning to bleed. They’d been pushed into this stuff by the Fed’s increased determination back in 2012 to create the biggest credit bubble in history by unleashing QE3. Wall Street touted it ingeniously as “QE infinity” to let investors know that this period of near-zero yield would last forever, and that they’d have to close their eyes and hold their noses and blindly trust Wall Street and pick up even the riskiest junk to earn any yield at all. And it worked wonderfully.

But now, “QE infinity” has been tapered out of existence, and the Fed is threatening to raise rates in 2015. The scheme is coming unglued. The money for junk bonds is drying up for individual companies, leaving bondholders to grapple with the sordid meaning of “junk.” Read…. Junk Bond Carnage, One Company at a Time  

 

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Thu, 12/04/2014 - 17:40 | 5518122 fibonacci's claus
fibonacci's claus's picture

"let them eat junk bonds!"

Thu, 12/04/2014 - 23:55 | 5519207 SAT 800
SAT 800's picture

They'll try to; it won't work of course. Chasing interest rates is one of the fundamental no-no's of investing wisdom. With Interest comes risk; those who forget this do so at their peril. One sad aspect of this situation is the number of people who have "funds" of one kind or another, that are bought up in this corporate bond market and they don't even know it.

Thu, 12/04/2014 - 22:38 | 5518930 SAT 800
SAT 800's picture

Oh boy. The Titanic comes to mind; for some reason. Boy, is it going to be sad when this great ship goes down; down to the bottom of that cold, cold, sea. This is going to make 2008 look like the girl's hockey team picnic.

Thu, 12/04/2014 - 14:08 | 5517243 Bemused Observer
Bemused Observer's picture

Corporations have grown too big, too fast. But it was never REAL growth. Real growth happens slowly, and results in actual 'meat and bones' constructions. This new kind of growth is nothing but hot air inflation, creating nothing but the illusion that things have 'grown'.
In an environment where business is tough, companies that HAVE experienced real growth may go under, but when that happens there is something there to liquidate, and divy-up amongst the investors.
With the kind of growth these guys have been doing, when THEY go under there is simply nothing left but the wrinkled outer shell of the balloon, there was never anything inside but vapor. And a lot more investors desperately seeking a piece of the pie.

Thu, 12/04/2014 - 16:38 | 5517898 LawsofPhysics
LawsofPhysics's picture

It is much, much worse.  "growth" now can be whatever you want it to be thanks to financialization.  Basically useless paper-pushing.  Want to move up from the G20 to the G7, simply print/create more paper/digital credits/money and push it back and forth faster.

 

Fuck the real economy/world. 

 

Thu, 12/04/2014 - 22:41 | 5518946 SAT 800
SAT 800's picture

You gotta love Amazon; they function on debt. it's an actual operating company that can never pay its bills. You just gotta love it. Has everybody gone insane ? Yep. Will it be a giant mess when it un-winds? Yep.

Thu, 12/04/2014 - 22:19 | 5518863 Lets Buy The Dip
Lets Buy The Dip's picture

i agree with you and yes they will PRINT till the cows come home, but right now, everyone just thinks that with QE gone, and interest rates about to rise, we will CRASH, when in fact THIS HAS BEEN HAPPENING ==> http://bitly.com/1rdUK8e   LOL

Thu, 12/04/2014 - 18:27 | 5518259 TeethVillage88s
TeethVillage88s's picture

6 Years after 2002 Crash, 6 Years after 2008-2009 Crash, 6 Years of war against Fixed Income People.

Looks like they removed Toxic Assets, used QE to Boost Stocks & USA-Wall Street Reputation, Permanent ZIRP & LIRP has to be the Plan to get the Biggest, Best, and Insiders to Grow in the US Economy while keeping Credit Markets Liquid.

No Honest US Growth really. Honesty has gone the way of the Dodo Bird. GDP is a fiction. Integrity & Responsibility is no longer part of the Business Culture. Culture Warp.

Up is Down. Left is Right. Over is Under. Vertical is Horizontal.

Thu, 12/04/2014 - 19:21 | 5518404 forwardho
forwardho's picture

Re: No Honest US Growth really. 

It's not just the US,

Japan,has had a massive drop in production of goods of value.

The EU, (even Germany) has also suffered a huge drop in productive output, (EU manufacturing down a staggering 34% over last two years.)

China, Well they kept their citizens from eating each other by building huge amounts of unneeded infrastructure and 100's of ghost citys.

Now the basic commodities, Oil, Iron ore, Copper ect needed to produce Goods of value are crashing in price due to shortage of demand.

Last night, I watched a snail crawl across the edge of a razor.

Thu, 12/04/2014 - 13:59 | 5517205 The Mav
The Mav's picture

Having started my investment career in the early 70's with the junk bond king, it has taken many years for the market to grow and get reidiculously comfortable with junk bonds - to the point where few consider them junk and are willing to invest at absurd risk/reward relationships.

My avatar suggests what will likely happen from my indigineous people group background.  The picture is taken from a "haka" - it means I am going to kill you and then eat you.

Thu, 12/04/2014 - 23:00 | 5519023 Bemused Observer
Bemused Observer's picture

I'm actually ok with that Mav. I've always said I have no problem with whatever game is chosen, as long as I know what I'm up against.
I can admire your chutzpah at the same time I prevent you from ever killing and eating me...I like your indigenous people, whoever they are...(the avatar pics are really small)

Thu, 12/04/2014 - 13:33 | 5517092 chomu
chomu's picture

A financial advisor buddy of mine was shifting his elderly clients more into high yeild earlier this yr with the argumant that "HY will fare far better in a rising rate enviroment. Tsys are going to get killed this year" Buahahahhhaaa. Sux cause those octogenarians wouldve banked if they had kept their Tsys and utilities.. 

Thu, 12/04/2014 - 14:32 | 5517054 LawsofPhysics
LawsofPhysics's picture

Wolf, you remain an idiot.   ZIRP is de facto QE forever.

It will remain this way unless the outstanding debt is dealt with in earnest or the liabilities on the government's balance sheet are removed.

Good luck.

Fri, 12/05/2014 - 00:07 | 5519237 SAT 800
SAT 800's picture

He's not an idiot.

Thu, 12/04/2014 - 13:14 | 5517021 disgruntled hou...
disgruntled housewife's picture

I can't breathe.

Fri, 12/05/2014 - 00:05 | 5519230 SAT 800
SAT 800's picture

LOL. Yeah, it's pretty exciting stuff, alright. Did you go to Wolfe's blog ? it's great. he really does his homework and publishes a lot of really thought provoking material. I was just thinking, this corporate bond bubble, or extravaganza, or whatever you should call it, it's size makes bubble seem inadequate, if this is really the particular head that this fish starts to rot from; and it looks as likely as anything, it could signal a new bull market in precious metals; which actually react primarily to fear, rather than inflation; unless, or until, inflation becomes such a meme that it causes fear. When the losses start coming thick and fast a lot of money will flow into the US Treasuries as always, but some of it, a sort of off-shoot will flow into the metals. I wonder if that's what we're seeing this last week. As the Silver and Gold market seem to have a new, higher, floor.

Thu, 12/04/2014 - 12:01 | 5516700 Boubou
Boubou's picture

The retired have been thrown into tha tip and are scratching around among risky assets to keep an income. I dont know if my assets will be called first or I myself.

Thu, 12/04/2014 - 11:59 | 5516687 Harry Dong
Harry Dong's picture

Honest question.

I hear "USA is going Japan" . rates will never rise.  And so forth.

Then I hear deflation first. Then inflation. Then hyperinflation.

The oil crash seems to be deflation. The market crash will be deflation.

But then base money is still on the books waiting to be gushered out. Which will be inflation.

So..question. Will 30 yr mortgage rates go up in the next 2 to 5 yrns?  If so, I'd like to get about 10 to 20 of them now. 

 

Thu, 12/04/2014 - 11:57 | 5516672 Ewtman
Ewtman's picture

When the 10 YR Treasury yields hit 3.5 - 4% the SHTF as explained here.

 

http://www.globaldeflationnews.com/10-yr-u-s-treasury-index-yieldelliott...

Thu, 12/04/2014 - 13:21 | 5517044 LawsofPhysics
LawsofPhysics's picture

LOL!  The past is never precedent, especially if you consider the current liabililities on that balance sheet of the .gov...

Thu, 12/04/2014 - 18:32 | 5518281 Harry Dong
Harry Dong's picture

One of you's is right and one is wrong completely. I wish you were right Laws of Physics...but I don't think you appreciate that government liabilities in a fiat unit are not solid. didn't greenspan or the bernank say that Social Security payments could be anything that congress wanted? [they'd just print what they need].

BTW, Here's a quote from the person you dissed:

"Other markets will also feel the pain of rising interest rates. Junk bonds, which are already on the brink of catastrophe, will begin to fail and the fallout will be huge. Insurance companies are selling annuities to people as if they are perfectly safe investment vehicles. Little do the owners of the annuities know that their policy is only as good as the underlying asset, which in most cases today is junk bonds. As the 10 YR interest rate starts to rise, the interest rate in junk bonds will skyrocket into oblivion, meaning prices will collapse, the vast majority will go to zero wiping out the policy holder and in many,many cases, the issuing insurance company."

I know this thread is getting old but I was going to see if there were any answers to my question. 

Thu, 12/04/2014 - 22:54 | 5518992 SAT 800
SAT 800's picture

Your question? Are fixed rate Mortgages going to go up in rates ? Who knows ? Your actualy question is should you be interested in owning them; the answere is no. Certainly not. There's a lot of markets in the world; the idea is thru careful research to determine where the odds are 90-10 in your favor. Forget about mortgages; there's so many things wrong with this it would take a book to outline it. Laws of physics is wrong, insofar as his thesis is that this situation in the bond market can continuie indefinietely; it cannot and will not. It's an unstable situation and human psychology will take care of the rest. The "Fed" is in charge of far less than usually imagined, and they certainly are not in charge of the corporate bond market.

Thu, 12/04/2014 - 10:25 | 5516356 JRobby
JRobby's picture

Once again, asset inflation fueled by debt is only happening at the highest level of the "game" The rest see deflation.

Thu, 12/04/2014 - 09:23 | 5516166 Ban KKiller
Ban KKiller's picture

Profit? Who needs it when you can borrow your way out and get paid? Said before...Russian roulette meets musical electric chairs. Zap! Bang!

Thu, 12/04/2014 - 12:44 | 5516861 hootowl
hootowl's picture

When businesses like Domino's Pizza, and others, go down burdened with corporate debt for buybacks, will the Executives who padded their bonuses/stock perks by fraudulently blowing up their stock price be prosecuted by the government Joos for fraud?  .....or simply beheaded/shot/hanged by the stockholders who will be left holding the bag?

Thu, 12/04/2014 - 14:06 | 5517225 Rearranging Dec...
Rearranging Deckchairs's picture

wow - what kind of moron pays a 34.4 trailing PE for a pizza company with a 1.1% yield and a negative book value? These valuations are insane! 

And what no one can read a balance sheet anymore?  This market is insane! 

Thu, 12/04/2014 - 06:06 | 5515940 Nobody For President
Nobody For President's picture

Been missing you on ZH Wolf, you are always a good read. I don't know if the Fed's ZIRP was/is criminal, insane, or both, but the ramifications roll out a long, long way. It is by now an old saw, but this is not going to end well. All this cheap money for the politicians and corporate lords who get goodies now to be paid back by the next generation is the classic recipe for disaster, from Rome forward. I'm an old fart, maybe I won't be around to see the end game - hope not.

Thu, 12/04/2014 - 23:16 | 5519093 ebworthen
ebworthen's picture

Agreed, always quality stuff from Wolf.

Amazon selling debt...J.P. Morgan rigging utilities...it's the year 2000 all over again, but 10X worse.

Pets.com and MySpace say hello to the new investors, and greet them with a paper horn.

Blow it while the liquor and free snacks last kids.

Thu, 12/04/2014 - 12:12 | 5516744 WhyWait
WhyWait's picture

No endgame til the last human dies, and they won't even know they're the last human.  But hang in there, we should with luck make it long enough to see the (next) Grand Finale!

My father died at 94, saying he was sorry he didn't live to see it.  But we all die too soon to see what happens next.

Thu, 12/04/2014 - 09:13 | 5516127 himaroid
himaroid's picture

+1

 

 

Thu, 12/04/2014 - 20:28 | 5518570 McCormick No. 9
McCormick No. 9's picture

Bond yield contagion growing and headed our direction. A buddy of mine flew Michael Milken around  in a brand-new (then) G-3 during his 80's heyday as a junk-bond fraudster. According to him, Milken was a real piece of work. He also was a pilot for Allen Glick, who had big-time mob connections, and owned hotels in Las Vegas. More criminals of a certain type, but he said that compared to Milken, Glick was a real prince, a nice guy.

I don't know where I'm going with this, but if yields are rising in junk bonds, it's ike a smouldering fire in some oily rags in the attic. Maybe you dont know it's going on, and maybe if you did, it wouldn't be a big deal, but what starts small and inconspicuous can grow into a real inferno. Oh, the rags are people like Milken and Glick, and the spontaneous combustion that sets them on fire is the karmic backlog of what these people deserve.

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