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Analysts have been warning of bubbles forming in high yield bond markets for some time now. We mentioned it earlier in the week. But that hasn’t stopped yield hungry investors stocking up on record levels of junk rated debt.
Maybe that’s because analysts have a poor reputation amongst private investors, maybe private investors have an unrealistic view of their own investing abilities or maybe the words of Gordon Gekko are ringing in their ears. “They’re analysts, they don’t know preferred stock from livestock.”
Either way no one is listening. But maybe that is about to change. Because two Harvard Business School Professors have modeled data that predicts overheating credit markets with surprising accuracy.
Professors, Robin Greenwood and Samuel Hanson of Harvard Business School, say that their research shows that a good indicator of credit market overheating is the share of all new corporate debt issues coming from low-grade issuers.
This measure is based on the quantity of credit issued, not just interest rates. Other studies focus exclusively on credit spreads, or the interest rate differentials between, say, junk and investment grade firms. Greenwood and Hanson argue that quantities of credit issued by low-grade versus high-grade firms add a lot of power when predicting credit market crashes.
So how big is the risk of a credit market crash today? Read their full report to find out.
Todays Other Top Stories
Bloomberg: – Visual guide to municipal bonds from Bloomberg. – Download this visual guide to the municipal bond market from Robert Doty at Bloomberg.
WSJ: – Discounted muni closed-end funds lure advisers. – Many closed-end funds that invest in municipal bonds are trading at attractive discounts in part over fears of rising interest rates and municipalities’ fiscal woes.
Left Banker: – 4 Muni bond CEFs that combine tax-exempt income with some upside Potential. – Municipal bonds continue their recovery from a dismal performance in 2013. Leveraged muni bond closed-end-funds offer opportunities for high, tax-exempt yields at discounts to their net asset values.
Bloomberg: – Puerto Rico has model in restructuring of Foxwoods. – For buyers of Puerto Rico’s bonds who anticipate a restructuring that would cut debt or delay payments, Connecticut’s Foxwoods Resort Casino may provide a roadmap to resolution.
LearnBonds: – Three dividend paying stocks you should own and never sell. – There are some companies so fundamental to the way the global economy functions, and so well run, they’re likely to flourish and reward investors from here to the next geological era. Warren Buffett calls dividend paying stocks “forever stocks,” but to clarify: I think you can buy shares of these companies and not lose a night’s sleep for the next 30 to 60 years.
ETF.com: – 4 Things to know about ‘robo-advisors’. – The so-called robo-advisory business is quickly growing, and it’s easy to understand the appeal of automated portfolio construction and management for a very low cost. This type of log-in, answer-a-survey, let-your-portfolio-underway type of experience has attracted millions of dollars from investors of all sizes. But there are risks that need to be understood.
Wall St Pit: – Considering QE, Mario? Buy U.S. bonds, not eurobonds. – The Eurozone needs to further ease monetary policy because under the current low inflation and high unemployment periphery countries need to suffer painful deflation. However, the ECB faces challenges other central banks do not face. This column proposes a way to overcome some of these hurdles. It argues that the ECB should buy US treasury securities, lowering the foreign exchange value of the euro. That would be the best way to restore the export sector of the periphery countries.
Market Realist: – An investor’s must-know guide to US Treasury auctions. – The U.S. Treasury Department issues Treasury securities of varying maturities to finance government debt. The yield on these securities is determined through a public auction process, where securities are offered for sale to institutional and retail investors. The purpose of the auctions is to obtain financing from financial markets at the most competitive cost.
Bloomberg: – Treasury five-year notes near cheapest since 2010 on Fed. – Treasuries fell as reports showed initial jobless claims were lower than forecast last week and a manufacturing index expanded, adding to speculation the Federal Reserve will raise interest rates at some point next year.
Fundweb: – Where are the opportunities in HY bonds? – With yields at record lows and an overall lack of value creating a challenging environment for high yield bonds, where are high yield managers currently finding opportunities?
WSJ: – Investors in Europe hungry for riskier debt. – Investors in Europe are buying up riskier debt at a record pace. They are also giving up many of the usual safeguards they would normally seek when lending companies cash.
Bond Vigilantes: – Video – some thoughts on emerging markets from Hong Kong and Singapore. – I recently visited Hong Kong and Singapore to attend some conferences and meet clients in the region. While travelling, I put together a short video to share some of our views on Asian emerging economies and emerging markets in general.
Reuters: – Pickings for the brave in emerging markets. – The brave few who waded back into emerging markets in March reaped substantial rewards, but investors say it is too soon to tell whether the recent bounce will become a sustained rally.
Pension Funds Online: – Emerging markets fixed income in 2014 – A constructive view for the discriminating eye. – Following a challenging year, 2014 is offering a more upbeat backdrop for emerging markets. Strong economic fundamentals that have driven the asset class over several years remain largely intact, technical dynamics are supportive, and valuations have improved. Significant risks remain, however, and country differentiation and asset allocation will be a key theme this year.
Matthew Bradbard: – The long-bond play. – Clearly the trend has been higher in the last four months as June 30-yr bonds futures have climbed 8 handles. This week’s consolidation just below the 135’00 level could signal an interim top.
FT: – Bonds for the long run. – If we know one thing about investing, it’s that time and the power of compounding make stocks an essential holding for savers, right? Well, maybe not, at least when the choice is to hold bonds with a reasonable yield instead and the excess returns from stocks have been on a long term downward trend.
Wells Fargo: – What’s bubbling up in bonds? – We’re talking Federal Reserve policy, the rally in municipal bonds, concerns in the high-yield corporate space, and how all this affects investment strategy with Jim Kochan, chief fixed-income strategist with Wells Fargo Funds Management, LLC.
HY and IG cash spreads 100bps and 40bps tighter respectively since last April when Stein & others warned of froth/risk in carry plays
— David Schawel (@DavidSchawel) April 17, 2014
Wasn’t it just Monday that everyone seemed to love the 10 yr at 2.61 after hating it most of the year? — Peter Tchir (@TFMkts) April 17, 2014
Remember when people were saying there would be a landslide of bankruptcies after Detroit to reduce pension obligations? That was funny.
— Bond Girl (@munilass) April 17, 2014