Visualizing Central Bank Mal-Investment-Driven Excess

One of the most egregious aspects of the Great Moderation was the issuance of large amounts of grossly mispriced extremely 'junky' debt at the peak as investors stymied by the lack of spread (return) pushed further and further out the credit risk spectrum. The driver at the time was the liquidity flood triggered by large-scale securitizations (and that ended well eh?); this time it is central banks providing the fuel for investors to seek yield through leverage (either through fundamental leverage in riskier firms or technical leverage through riskier instruments). To wit, the last few weeks have seen a resurgence of issuance of PIK-Toggle bonds.


These extreme junk credit-rated bonds with very high default risk offer 'attractive' yields relative to the financially repressed idiocy of the rest of the capital markets but the Pay-In-Kind nature means simply - do not expect coupons and principal return in cash, but we promise to pay that principal back by offering you more 'junky' bonds (extending maturity for example).


Issuance of PIKs has re-surged once again


The last time we saw a surge like the current one was during the ECB's LTRO fiasco, and once again with QEternity on the table, that excess liquidity 'forces' money to work in these over-leveraged and under-compensated (risk-wise) instruments. With rates held low and IG and HY spreads technically compressed, we suspect we will see more PIK-Toggle, Cov-Lite, Junior-Mezz CLOs - and suspect this won't end well.

and CNBC's Gary Kaminsky pointing out the junkiness of these deals..."This is Junk, This is Bad!"

Chart: Bloomberg Brief