How Did That Get Into My Bond Fund??

Authored by John Rubino via DollarCollapse.com,

Towards the end of financial bubbles, people who previously paid little attention to things like “quality” start trying to figure out what they actually own. The result is either funny or terrifying, depending on the point of view.

This time around bonds are (finally) getting a closer look. From today’s Wall Street Journal:

Decade of Easy Cash Turns Bond Market Upside Down

Debt deals set records from Tajikistan to East Rutherford, N.J., as investors keep hunting yield.

Last fall, a hydroelectric dam in Tajikistan, the government of Portugal and a cruise-ship operator all issued debt at unusually low interest rates. The seemingly unconnected deals are part of a proliferation of aggressive bond sales influenced by a decade of loose monetary policy and a demographic shift in global investing.

Historical limits on who can borrow, and at what cost, have broken down as fund managers agree to previously unpalatable terms.

Central bankers in the U.S., Europe and Japan helped shape the new breed of deals by simultaneously purchasing over $1 trillion in high-quality bonds since 2009 and lowering benchmark interest rates to jump-start their faltering economies. Modest economic growth came, but the strategy crowded private investors out of safe debt, prompting them to buy riskier bonds to boost returns.

Retiring baby boomers amplified the trend by moving their investments away from stocks into bonds, boosting assets in U.S. bond mutual funds to $4.6 trillion in November from $1.5 trillion a decade earlier, according to the Investment Company Institute, a trade group for investment firms.

The article goes on to present some examples of bonds that might not exist in less bubbly times.

Here are three:

  • Tajikistan borrowed $500 million to finish construction of a hydroelectric dam that was started under the Soviet Union. This is one of the world’s most corrupt countries – a fact noted in the offering prospectus — and the dam’s electricity will be sold to Afghanistan, which, as most Americans know, is in the middle of a civil war that the “good guys” might easily lose (also mentioned in the prospectus). The deal’s investment bank, Citigroup, initially marketed the bonds to yield 8% but received such a warm welcome that it cut the rate to 7.1%. Buyers included big U.S. firms like Fidelity, which bought $14 million of the bonds, presumably to boost the yield of funds sold to retirees.
  • The American Dream Mall in East Rutherford, N.J. broke ground in 2003 but ran out of money to finish construction. In 2017 the mall’s current owner—its third—employed Goldman Sachs to sell $1.1 billion of 6.9% muni bonds, fully half of which were bought by the Nuveen fund family. “Unlike most malls, American Dream will derive most of its revenue from experiential attractions that can’t be replicated online, rather than depending on retailers,” said a Noveen executive.
  • On Nov. 8, Portugal sold €1.25 billion ($1.55 billion) of 10-year bonds that yielded 1.94%—the lowest rate ever for the country. Portugal needed an international bailout in 2011 and still has a junk credit rating. It’s one of the most heavily indebted countries in Europe, but the auction set its borrowing cost below that of the U.S. government, which sold 10-year bonds in November to yield 2.31% [those bonds now yield 2.7%].

 

What does all this mean? In a nutshell, crazy stuff has been happening under the placid surface of the fixed income market. None of the three bonds profiled here are especially good bets, and retiree and pension fund portfolios are full of similarly toxic paper.

When a few such deals blow up – as bubble assets always eventually do – investors will start wondering what’s going to blow up next. And they’ll find not just a few but many, many bad ideas lurking in their “low risk” accounts. The resulting stampede for the exits will look familiar to anyone who lived through the tech stock and housing busts of previous decades.

With one big difference. This time around crappy, crazy paper is not just in tech stock and ABS portfolios. It’s everywhere. Trillions of dollars of sovereign debt will tank along with the sketchy shopping mall and emerging market infrastructure bonds. The resulting bust will be more broad-based and therefore way more interesting than anything that’s come before.

Comments

BigJim Mtnrunnr Thu, 02/01/2018 - 19:32 Permalink

 ... The resulting stampede for the exits will look familiar to anyone who lived through the tech stock and housing busts of previous decades.

With one big difference. This time around crappy, crazy paper is not just in tech stock and ABS portfolios. It’s everywhere. Trillions of dollars of sovereign debt will tank along with the sketchy shopping mall and emerging market infrastructure bonds. The resulting bust will be more broad-based and therefore way more interesting than anything that’s come before.

Which is why it almost certainly won't be allowed to happen. The minute equities or debt looks like it's making a serious move to the downside, the CBs will be backing up the truck to "protect capitalism from itself!"

In reply to by Mtnrunnr

TeethVillage88s SWRichmond Thu, 02/01/2018 - 11:15 Permalink

Titus video for your viewing pleasure. 9 mos old not sure I have seen this one.
https://www.youtube.com/watch?v=2gK3s5j7PgA
All the Plenary's Men
BestEvidence Channel
Published on Apr 28, 2017
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- What does FBI/DOJ, Federal Reserve, Congress, Trump admin have to say, Judicial Watch?

In reply to by SWRichmond

2banana Thu, 02/01/2018 - 10:48 Permalink

Ha!  They didn't even mention the bonds of Chicago, Newark, Philadelphia, Camden, Buffalo, Hartford, Puerto Rico or any other long term control democrat city infected with public unions...

MrSteve Thu, 02/01/2018 - 10:49 Permalink

The muni market is looking at $107 billion in bonds being offered by the state of Illinois when a Cook County taxpayer notice alerts property tax payers that the county is $29 billion in arrears for its pension fund. The scale of bankruptcy / default is beyond galactic in Chicago and Illinois.

shizzledizzle Thu, 02/01/2018 - 10:52 Permalink

Yep. Spent the better part of the day reading the prospectus on all my 401k funds earlier this week. Ended up rolling everything to stable value funds (And I don't feel particularly good about those) for the time being. There were alarm bells in EVERY SINGLE FUND. This was through ML by the way.

cheech_wizard Thu, 02/01/2018 - 11:03 Permalink

I'm still trying to grasp what the purpose of that photo in the article is for.

Is that a new advertising campaign featuring Juan Valdez pushing bonds for the National Federation of Coffee Growers of Colombia?

moneybots Thu, 02/01/2018 - 11:10 Permalink

Towards the end of financial bubbles, people who previously paid little attention to things like “quality”...

 

When junk is tagged AAA, what difference does it make whether one is paying attention to quality, when lack of quality is being hidden from view?

Some of the smart clients who figured out Bernie Madoff, thought he was only screwing over other people. Turned out they were wrong.

Buck Johnson moneybots Thu, 02/01/2018 - 12:44 Permalink

Yep and they where sitting around with their you know what in their hand screaming why why me.  He did it to you because he could and he still didn't care.  They always think that those people are the ones that will be used not me.  They don't realize that their is a hierarchy and greed in their group also.  They prey on the small and ignorant in their group.  And use them for their pleasure.

That's the problem with using people, it gets so common for your people to do this that eventually your own start to use you.

In reply to by moneybots

DaMule Thu, 02/01/2018 - 11:17 Permalink

I believe the near insolvent NJ employees pension plan bought a significant amount of the American Dream Mall bonds. NJ Senate Leader Sweeney called it a "win win" for NJ.  

AbbeBrel Thu, 02/01/2018 - 11:24 Permalink

A little bird tells me that these debt offerings are likely all COVlite. What that implies is that the vultures who prey on distressed debt won't find anything to pick at once these things die. There will be nothing but bones, and bones won't pay legal fees for recovery of principal. Principal, or Principles? Who needs principles? This is all OPM, and collecting management fees are what matters today.

dltff-ya Thu, 02/01/2018 - 12:07 Permalink

Tiny vacation from politics- Patience requested- maybe this is naive but here goes.
In the face of a long run of interest rate rise, a ginnie mae fund will at first drop of course because new bonds have higher yield than the existing bond portfolio but then people will start to refinance more and the ginnie mae fund managers will have to buy replacement bonds at the higher rate, so at some point the ginnie mae bond fund shares should start to rise again -- right? How long will this take from the start of moderate interest rate rise? (year, two years ... )

tuetenueggel Thu, 02/01/2018 - 12:33 Permalink

Calm down, calm down, It´s the banksters who sold this highly valuable shit to you. It´s rated AAA by Moody and all others.
So don´t worry, be happy.

SweetDoug Thu, 02/01/2018 - 13:05 Permalink

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And when all these toxic assets, like shoals hidden under calm waters, start ripping the bottoms out of the now sinking pension fund boats?

 

"Go-ooo-oooo-oooooo-vvv-vvvvvvvvv--vvvvv-eee-eee-rrrrrr--ment!

 

The taxpayer takes it in the woo-who!

 

OJO

V-V