I was misinformed
Recycles dryer sheets
- Joined
- Jun 14, 2015
- Messages
- 106
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/...ight-region&WT.nav=opinion-c-col-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.
https://www.nytimes.com/2018/08/09/...ight-region&WT.nav=opinion-c-col-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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