WTF Chart Of The Day: Draghi's 'Markets' Have "Totally Gone Nuts"

Tyler Durden's picture

Two weeks ago we summarized the stunning impact that ECB Predit Mario Draghi's 'whatever it takes' efforts have had on European capital markets in one simple chart...

The European Central Bank now owns 14.8% of all eligible European corporate bonds.

However, as's Wolf Richter points out the ECB’s efforts to buy corporate bonds as part of its stupendous asset buying binge has not only pushed a number of government bond yields below zero, where investors are guaranteed a loss if they hold the bond to maturity, but it has also done a number – perhaps even a bigger one – on the euro junk-bond market.

It has totally gone nuts. Or rather the humans and algorithms that make the buying decisions have gone nuts. The average junk bond yield has dropped to an all-time record low of 2.42%.

Let that sink in for a moment. This average is based on a basket of below investment-grade corporate bonds denominated in euros. Often enough, the issuers are junk-rated American companies with European subsidiaries – in which case these bonds are called “reverse Yankees.”

These bonds include the riskiest bonds out there. Plenty of them will default, and losses will be painful, and investors – these humans and algos – know this too. This is not a secret. That’s why these bonds are rated below investment grade. But these buyers don’t mind. They’re institutional investors managing other people’s money, and they don’t need to mind.

It’s perfectly good to invest in risky instruments as long as you’re being paid to take those risks or have a chance to make serious money. If you buy gold and silver bullion, you know you could make or lose a lot of money. But at a yield of 2.42%, these junk bonds will never make any money if you hold them to maturity, except for covering mild inflation. The risk of losses – including from default – are large. And investors are not getting paid to take those risks. It’s one of the most obviously lopsided deals out there.

The average yield of these junk bonds never dropped below 5% until October 2013. In the summer of 2012, during the dog days of the debt crisis when Draghi pronounced the magic words that he’d do “whatever it takes,” these bonds yielded about 9%, which might have been about right.

Since then, yields have plunged (data by BofA Merrill Lynch Euro High Yield Index Effective Yield via St. Louis Fed). The “on the Way to Zero” in the chart’s title is only partially tongue-in-cheek:

The chart below gives a little more perspective on this miracle of central-bank market manipulation, going back to 2006. It shows the spike in yield to 25% during the US-engineered Financial Crisis and the comparatively mild uptick in yield during the Eurozone-engineered debt crisis:

How does this fit into the overall scheme of things? For example, compared to the US Treasury yield? US Treasury securities are considered the most liquid and the most conservative investments. They’re considered as close to a risk-free financial instrument as you’re going to get on this earth. Turns out, from November 2016 until now, the 10-year US Treasury yield has ranged from 2.14% to 2.62%, comfortably straddling the current average euro junk bond yield of 2.42%

This chart shows the BofA Merrill Lynch Euro High Yield Index (red line) and the 10-year Treasury yield (black line). Note how they used to be worlds apart, and how the spread between them blows out when investors suddenly see risks again, with junk bond prices plunging and yield surging, while Treasuries barely quiver:

If you want to earn a yield of about 2.4%, which instrument would you rather have in your portfolio, given that both produce about the same yield, and given that one has a significant chance of defaulting and getting you stuck with a big loss, while the other is considered the safest most boring financial investment out there?

The answer would normally be totally obvious, but not in the Draghi’s nutty bailiwick. That this sort of relentless and blind chase for yield – however fun it may be today – will lead to hair-raising losses later is a given. And we already know who will take those losses: The clients of these institutional investors, the beneficiaries of pension funds and life insurance retirement programs, the hapless owners of bond funds, and the like.

In terms of the broader economy: When no one can price risk anymore, when there’s in fact no apparent difference anymore between euro junk bonds and US Treasuries, then all kinds of bad economic decisions are going to be made and capital is going to get misallocated, and it’s going to be Draghi’s royal mess.

In the US, “covenant-lite” loans – risky instruments issued by junk-rated borrowers, with few protections for creditors – set an all-time record at the end of the second quarter. Read…  Risk has been Abolished, According to Institutional Investors

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Looney's picture


The European Central Bank now owns 14.8% of all eligible European corporate bonds.

Get to work, Mr. Draghi, you still have 85.2% to buy.   ;-)


Haus-Targaryen's picture

I’m not sure what I should take from this …

Investors trust the euro junk-bond market more than 10 year UST (given the Fed can print fiat, this seems rather inflationary outlook for the USD) or investors think there is more upside in the euro than the USD.

It would be interesting to see high-yield yields in each corresponding EMU nation, to see if redenomination risk is also working behind the scenes here.

We live in interesting times.

Also interesting to note, Draghi is doing this to give the various EMZ member states the opportunity to put their respective financial houses in order and on a sustainable path.  Even our favorite EU Cheerleader on here Ghordo has said as much.  The problem lies with the various government's HAVEN'T taken advantage of this opportunity to right their boats and instead used it as a borrow and spend spree.  Draghi's monetary policy is the only thing holding the euro together at this point, and that, like everything else in life has a limited survival rate. 

medium giraffe's picture

Weren't EU banks were mandated to hold a percentage of eurojunk?  A case of having to rather than wanting to perhaps.

Ghost of PartysOver's picture

I’m not sure what I should take from this …

Simple actually.  With all the CB intervention in the markets, they have become a Financial Bomb in search of a spark.  This can go on for a long time but at some point the Party will be over.  The losses will be so ginormous that the only option will be a complete reset.  Only real question is what will the Spark be.

Iskiab's picture

Golden rule - there's always someone dumb enough to buy a bad investment, just don't get caught holding the bag.

It's musical chairs where everyone know there aren't enough seats, but as an investor you can't sit down before the music stops.

Case in point, with the euro increasing relative to the dollar, those who're holding have done okay. No reason to change behaviour until the music stops.

Slarti Bartfast's picture

Draghi doesn't give a shit. 

Money_for_Nothing's picture

UST are stored in Federal Reserve data base. To change them to spendable EUROS would leave a bright trail and could be held up at any time by venal bureaucrats. Same reason people go to loan sharks instead of payday lenders?

DirtyHarry's picture

Normalise for exchange rates (if you are banking in EURO), look at EURUSD, and you definately are losing a lot of money (in EURO) by having been in in 10-year US Treasuries (just saying).

JoJo Kracko's picture

But at a yield of 2.42%, these junk bonds will never make any money if you hold them to maturity, except for covering mild inflation. 


Mild inflation?  Do you mean US gov quoted inflation?   Real inflation has been averaging out to 5.18% for the past 21 years.   And in an absurd, unreal coincidence, the average return on the S&P 500 has also been 5.18% compounded annually for the past 21 years.


Unfortunately this means that if you invested in an S&P 500 index matching fund in 1995, your real gains netted out to nothing more than allowing you to have the same purchasing power you had back in 1995, with today's multiplied, but devalued dollars. (Sadly, only if we are assuming you paid nothing in commissions/fund fees)


Ain't it great knowing you have to do better than 5.2% gains annually to have any real increase in purchasing power over time?

Or conversely, ain't it great knowing your dollars are losing 5.2% of their value every year if you are just leaving them in cash in your mattress or in a bank earning 0.1% interest?

gdpetti's picture

IT's all fiat... so worthless in the end, this game goes on until it crashes, same as always... a 'con' game, short for confidence, thus those surveys to test how well the propaganda parade is working on the masses.

all-priced-in's picture

UST debt should be considered junk - NFW this ever gets paid back -


Default - either outright or inflate it away are the only choices.



indygo55's picture

They will own all the sovereign bonds, all the corporate bonds and all the equities. When they are finished they will own everything, all the best land, the mines, the gold and silver, the farms the financial assets, everything. And the taxpayers paid them to do it. The taxpayer paid them to do it. Let that sink in.

Welcome to communism/totalitarianism/whateverism. There will need to be made a new term because this has never happened before. And the taxpayer paid them to do it.