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Article on current market for corporate debt
Old 08-09-2018, 06:39 PM   #1
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Article on current market for corporate debt

A new opinion piece by William D. Cohan in the NY Times (several articles available free each month for non-subscribers) has an interesting and alarming discussion of the state of the corporate credit market

https://www.nytimes.com/2018/08/09/o...l-right-region

The author's contention is that, in the aftermath of QE, long term rates for junk bonds remain unreasonably low but that this cannot continue. He writes:

"right now, the debt market is broadcasting a dangerous message: Investors, desperate for debt instruments that pay high interest, have been overpaying for riskier and riskier obligations."

"junk bonds [...] historically have yielded around 10 percent or more, to compensate investors for taking the risk of buying the debt of such companies. These days, junk bonds yield around 6.25 percent, meaning that investors — still desperate for yield — have overpaid for these bonds sufficiently to drive down their effective yields to levels that fail to compensate them for the risks they are taking."

"In the years leading up to the 2008 financial crisis, a sustained period of low interest rates led to a widespread deterioration of credit standards for mortgages, among other securities. The same thing is happening now for other kinds of loans and debt instruments."

This article touches on issues relevant to several recent ER-org threads related to interest rates. The author also has some comments on the situation of AT&T - the subject of a recent thread here.

I know that "the sky .../is/may be/will soon be/... falling" articles are typically not well received here, but I would be interested to hear what you folks think about Cohan's article.
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Old 08-09-2018, 07:02 PM   #2
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I'm sorry I wasted my time reading it.
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Old 08-10-2018, 02:05 AM   #3
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It's all a bubble inflated by the funny money policies of the world's Central Bankers and when they unwind their fake QE it's going to end with all your assets worth nothing. Yeeeowwww.

Or not.

Seems like Junk bonds used to yield 10% because Treasuries used to yield 5-7%. Now they yield 6-7% with Treasuries at 2-3%. What am I missing? There's always been a business cycle, where things overexpand, then contract with defaults in the weak links helping cull the herd. I'm not too alarmed.
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Old 08-10-2018, 04:36 AM   #4
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I always stay within investment grade, although sometimes right at the limit. My last bond buy was BBB-, ~8 years, at 4.9%. Didn't think that was too bad.
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Old 08-10-2018, 09:00 AM   #5
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It is interesting that, with tens of thousands on analysts and professional asset managers out there dealing in bonds every day, that it is only this guy who has identified this widespread mispricing and consequent looming risk.

There are thousands of chattering financial monkeys out there, all making forecasts of future random events. When something exciting happens, one will have forecasted it and he will be crowned "genius monkey." Until his next forecasts fail.

But hey, maybe this "special correspondent for Vanity Fair" will be the next genius monkey. Stay tuned.
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Old 08-10-2018, 09:12 AM   #6
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Sure, there will be another financial credit crunch. But I think it will be more like the one in late 2001/2002 rather than a repeat of 2008.

There is a lot of wind to come out of the sails. Corporate profits will drop. Companies will stop buying back stock. Some companies will go under. Default rates on junk bonds will rise. But we have been through this before.

I avoid junk bonds as I use my bond allocation as ballast against my equity allocation, so I don’t care to hold any bond type that falters when equities stumble.

People still reaching for yield will get burned, as they always do. I say still - because as interest rates rise some of those folks will be switching back to more conservative fixed income.
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Old 08-10-2018, 09:25 AM   #7
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Quote:
Originally Posted by audreyh1 View Post
Sure, there will be another financial credit crunch. But I think it will be more like the one in late 2001/2002 rather than a repeat of 2008.

There is a lot of wind to come out of the sails. Corporate profits will drop. Companies will stop buying back stock. Some companies will go under. Default rates on junk bonds will rise. But we have been through this before.
^ What Audrey said.

Looks to me like the next downturn will resemble the more familiar recessions of the past rather than the Grand Poobah version we saw in 08/09. That doesn't mean it won't be very unpleasant for those who get direct hits though.
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Old 08-10-2018, 12:05 PM   #8
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The author says things don't look good, but he does not say exactly when it will come tumbling down. That's the harder part. To profit you need to know when, not just what.

It's the same as with the stupid housing bubble in 2006-2007. Anybody with half a brain knew it was not right, but few were able to profit off it. Most just went along for the ride, or hoped that it would not hurt bystanders like themselves.
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Old 08-11-2018, 06:07 PM   #9
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Just saw an article with some hard numbers.

It said the total global debt has grown from $97T in 2007 to $167T now in 2018. That's T as in "trillion". That's all debts, not just corporate debts.

"Nah, it doesn't matter", say some people. "Party on!"

I think it matters, but don't know what I can do, and how to protect myself.

PS. I am still party'ing, but warily.
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Old 08-11-2018, 06:16 PM   #10
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Quote:
I know that "the sky .../is/may be/will soon be/... falling" articles are typically not well received here, but I would be interested to hear what you folks think about Cohan's article.
Methinks you're pretty much right on that... but FWIW. I think it reflects a similar opinion as this one, posted here: Post #19

CPI... and what else?
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Old 08-12-2018, 05:04 AM   #11
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Originally Posted by REWahoo View Post
^ What Audrey said.

Looks to me like the next downturn will resemble the more familiar recessions of the past rather than the Grand Poobah version we saw in 08/09. That doesn't mean it won't be very unpleasant for those who get direct hits though.
What Audrey said as well.

When I was in high school 50 years ago (!), I read a book by Harry Browne; forgot the name, something like "How to profit from the coming depression" or something.

It was quite compelling and I did learn about about basic economics from it but his predicted 'coming depression' never came.

The doom and gloom never seems to match the reality be it financial, social or otherwise. (remember back in the 70's? by now we should be completely out of oil and the globe so over populated that we'd be all starving!)
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Old 08-12-2018, 05:55 AM   #12
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Bond investors are always searching for yield. The big question is how much protection they are willing to give up to get it. The current situation is not as bad as 2006, according to the LSTA https://www.lsta.org/news-and-resour...worst-of-times
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