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 [15] 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 [16]:
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:
[17]
[18]
[19]
And speaking of balance sheet engineering, there's this [20].
