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Gundlach Lieutenant Says Risk/Reward In US Corporate Credit Most Unattractive Proposition Ever
Another day, another big name warns of a bond bubble, and this time it’s the (new) Bond King himself. On the heels of Jamie Dimon’s critique of credit market liquidity and what a lack thereof could mean in a crisis, Jeff Gundlach and one of his DoubleLine deputies are out calling US IG “one of the most unattractive risk-return propositions” ever witnessed. Between abysmally low yields, heightened rate sensitivity heading into a rate hike cycle, and balance sheet re-leveraging on the part of US corporations, it’s a bad time to be betting on corporate credit.
Via Bloomberg:
They’re yielding about the least ever, with the average dipping under 2.9 percent this month. Prices of the debt are more sensitive to interest-rate increases than at any time in the past 20 years, just as the Federal Reserve considers raising them.
And now the fortress balance sheets that companies built in response to the 2008 credit crisis are being eroded, with executives increasingly eager to borrow cheaply to satisfy shareholders starved of revenue growth in a sluggish economy.
“In my 30-year career, it’s one of the most unattractive risk-return propositions that I’ve seen,” said Baha, who helps manage $73 billion as the director of global developed credit at Jeffrey Gundlach’s DoubleLine Capital in Los Angeles…
After more than six years of short-term interest rates near zero and a net $1.2 trillion of investor cash placed into bond funds, the investment-grade corporate bond market has ballooned to $4.8 trillion, according to a Bank of America Merrill Lynch index. A measure of the debt’s sensitivity to interest-rate changes, expressed in years, reached a record 7.16 this month, from 5.9 at the start of 2009.
Meanwhile, investors can no longer count on IG issuers to be especially prudent when it comes to their balance sheets. Why? Well because, as we’ve explained on a number of occasions lately, they’re busy keeping the equity markets near all-time highs and inflating their earnings by issuing debt to buy back shares (i.e. re-leveraging ahead of the Fed while investors are still hungry for any semblance of yield):
Some in the market are beginning to sound the alarm that companies have been letting their conservative policies slip as activist stock investors push them to boost share prices. The allure of record-low borrowing costs for even the lowest-rated issuers is encouraging them to pay for it by leveraging their balance sheets.
“There’s no reason for treasurers not to do buybacks or pay dividends at these rates,” Citigroup Inc. credit strategist Stephen Antczak said in a telephone interview.
So just some good old fashioned financial engineering impairing corporate health just as equity prices indicate US companies are healthier than ever and just as shrinking dealer inventories ensure that the secondary market is dry as California when it comes to liquidity. But as Bloomberg notes, summing up, what’s an investor to do when central banks are shoving things “down their throats?”
“Central banks have pushed investors out the risk spectrum, to the benefit of companies,” said Scott Carmack, a money manager at Portland, Oregon-based Leader Capital Corp., which oversees $1.5 billion in fixed-income assets. “Investors take what is given to them, it’s shoved down their throat and they smile and take it because there is nowhere else to get yield.”
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A gentle reminder:
And speaking of balance sheet engineering, there's this.
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go long on nailguns
* always (and i do mean ALWAYS) carefully read the owners manual to ensure safe and proper operation
Lemme guess... knowing this, he's still fully invested?
Well, not him. His clients, though....
Really? Don't get me wrong I have not seen a bond I've liked for a long time, but I don't think this guy has seen JGB's or the swiss 10 year. There are worse places to be that US corporate.
We are all fucked, doesnt matter where you invest in the world. When this blows no one will be spared. If you find yourslef on Earth then you are in the worse place.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
Stating the obvious, is that how you drag down a big Wall St. paycheck? No problem, I've shoveled enough bullshit in my life to be really good at it and the verbal kind is much easier on my back.
You think you hate it now, but just wait.
Great, another Fuck-Tard telling us another asset class is over valued. Tell us something we don't already know and BTW, what would you suggest is a solid value proposition these days? Equities (surely you must be joking and stop calling me Shirely, from the movie Airplane), real estate (talk about interest rate sensitive), soverign debt (you must be kidding as these are the most overleveraged with absolutely no equity or no collateral organizations the world has ever witnessed), maybe EM's or I know, the Hong Kong market which is on its way to the moon.
The problem know is that everyone is coming out of the wood works and calling for a major correction, in just about everything and asset class but cash which of course is great until your caught holding too much when the deflationary collapse lets loose into a hyper-inflationary environment.
For know, I'll stick to my SWAG investment strategy - Silver, wine, art, and gold as at least I can drink the wine, enjoy the art, barter the silver, and hold the gold as I know that Asians and Indians will always be in the market for this barbaric relic.
I think rich people are saying this because they're as frustrated as us. Aren't guys like Warren Buffet sitting on record amounts of cash? Cash doesn't create more cash. Every minute spent waiting for a crash is another minute of holding cash instead of real assets. The sooner it crashes, the sooner rich people (and us) can buy productive assets at great prices. They're not warning everyone because they're nice people. They want to make some money, and they can't do that when the market refuses to crash.
ABS = anything but securities.
FWRL = food, water, roof & lead.
I agree with the corporate re-leveraging part of her thesis, but not so much the, "heading into a rate hike cycle" part of it.
"In my 30-year career, it’s one of the most unattractive risk-return propositions that I’ve seen,” said Baha.
The quote and punctuation in this article is inaccurate. When corrected, it should read as follows:
"In my 30-year career, it’s one of the most unattractive risk-return propositions that I’ve seen. Bahahahahahahaha !”
Lest we forget it is the equity tranche that has been subordinated by this record amount of debt that is most at risk. The debt that sits above it doesn't get impaired until the equity goes to zero. Which several IG names of today eventually will due to the rollover of this massive amount of debt.
Next thing you know, we will be blaming the Fed for being "forced" to pay obscene bonuses to corporate executives.