16/7/19: Corporate Yields are Heading South in the Euro Land

Some of the euro area's junk-rated corporate debt is now trading at negative yields, and over 15% of near-junk debt is also charging the lenders to provide cash to financially weaker companies:

Source: WSJ

While the overall stock of negative yielding debt (sovereign and corporate) is now nearing $13.5 trillion worldwide:

Source: Bloomberg

All in 51 percent of all European Government bonds are trading at negative yields, and just over 30 percent of all investment grade corporate bond issued in Euro.

The percentage of negative yielding debt amongst junk-rated corporates is small. Bank of America ML estimated that the percentage of BB-rated European corporate bonds with negative yield rose from 0.225% at the end of May to 1.5% at the end of June. Back then, 14 companies had junk-rated bonds rated BB or lower with negative yields, with total market value of $3 billion.

The chart below plots corporate junk-rated bond yields index for the euro issuers:

Meanwhile, Greek Government bonds auction this week went into a massive demand overdrive. Greece sold more than EUR13 billion worth of 7-year bonds, almost EUR11 billion more than it planned originally, at the yields of 1.9 percent, or 2.4 percentage points above the Eurozone benchmark average. The spread to Eurozone benchmark has now fallen from 3.73 percent in March sale. In fact, U.S. 7 year bonds are selling at a yield of 1.97 percent, implying lower yields for Greek debt than the U.S. debt.

Here is the chart plotting Euro area sovereign yield curves for AAA-rated and for all bonds:

The yields on AAA-rated debt are negative out to 13 years maturity, and for all bonds to 8 years maturity. 

19/10/18: There's a Bubble for Everything

Pimco's monthly update for October 2018 published earlier this week contains a handy table, showing the markets changes in key asset classes since September 2008, mapping the recovery since the depths of the Global Financial Crisis.

The table is a revealing one:

As Pimco put it: "The combined balance sheets of the Federal Reserve, European Central Bank, Bank of Japan, and People’s Bank of China expanded from $7 trillion to nearly $20 trillion over the subsequent decade. This liquidity injection, at least in part, underpinned a 10-year rally in equities and interest rates: The S&P 500 index rose 210%, while international equities increased 70%. Meanwhile, developed market yields and credit spreads fell to multidecade, and in some cases, all-time lows."

The table points to several interesting observations about the asset markets:

1. Increases in valuations of corporate junk bonds have been leading all asset classes during the post-GFC recovery. This is consistent with the aggregate markets complacency view characterized by extreme risk and yield chasing over recent years. This, by far, is the most mispriced asset class amongst the major asset classes and is the likeliest candidate for the next global crisis.
2. Government bonds, especially in the Euro area follow high yield corporate debt in terms of risk mis-pricing. This observation implies that the Euro area recovery (as anaemic as it has been) is more directly tied to the Central Banks QE policies than the recovery in the U.S. It also implies that the Euro area recovery is more susceptible to the Central Banks' efforts to unwind their excessively large asset holdings.
3. U.S. equities have seen a massive valuations bubble developing in the years post-GFC that is unsupported by the real economy in the U.S. and worldwide. Even assuming the developed markets ex-U.S. are underpriced, the U.S. equities cumulative rise of 210 percent since September 2008 looks primed for a 20-25 percent correction. 

All of which suggests that the financial bubbles are (a) wide-spread and (b) massive in magnitude, while (c) being caused by the historically unprecedented and over-extended monetary easing. The next crisis is likely to be more painful and more pronounced than the previous one.

24/1/16: High Yield Bonds Flash Red for Growth

An interesting regularity in the markets observed by JPM research: High Yield debt as a lead indicator of recessions… and of equities…

Self-explanatory…

Some more academic links on the high yield bonds forward prediction of business cycles:

• Via credit risk channel: Wang, Pengfei and Miao, Jianjun, "Credit Risk and Business Cycles" (September 8, 2010)
• Via productivity channel: Estevão, Marcello M. and Severo, Tiago, "Financial Shocks and TFP Growth" (Janurary 2010). IMF Working Papers, Vol. , pp. 1-35, 2010
• Via yield curve shape: Peña, Juan Ignacio and Rodríguez, Rosa, "On the Economic Link Between Asset Prices and Real Activity". Journal of Business Finance & Accounting, Vol. 34, Nos. 5-6, pp. 889-916, June/July 2007.