HIGH YIELD SPREADS NOW LOWEST SINCE BEFORE CREDIT CRISIS
Signs of complacency continue to pop up all over the place. In addition to the continuing market troubles in China, the very high bullish sentiment and the troubles in Europe the bulls just continue to pile head first into high risk assets. This is perhaps no more apparent than it is in the surge in the Merrill Lynch High Yield Index. As of yesterday, high yield bonds traded at just under par at 99.47. The high yield market hasn’t traded at this level since the Summer of 2007 just before the markets began to unravel.
Of course, there are two ways to view this:
1) You believe this is a sign of high investor risk appetite based on the vastly improved economic conditions. You also believe the credit markets are very healthy.
OR
2) You view this as a sign of high investor complacency and overconfidence as the credit woes at the consumer level, corporate level and sovereign level remain far from resolved.
Source: Merrill Lynch
So far this is net positive as overall credit is weak … yes HY issuance has been a record, but a lot less than the loss in asset-backed credit volume … capex, and M&A has also been restrained. When Goldcorp decides to build a new 80 story corporate headquarter … sell. Also, would you rather by Wynn junk or Greece … mmm easy call … US bankruptcy laws apply in only one of these.
Really remarkable. It truly is like the “Great Recession” never happened. And I’ve always wondered, even if it did happen, was it really so “great”? Seriously, they say this was the toughest financial crisis since the Great Depression that the world has seen but what did it really entail for 85%-90% of people that didn’t lose their jobs? It involved debt restructuring and/or forgiveness for the vast majority of societal players that mispriced risk or over-extended themselves, including consumer, corporate and government actors. I understand that the system itself was at risk in 2007-2009, but really, have the sacrifices that typify “great recessions” really taken place at all this time? If the answer is no can we call it a “great recession”? At some level, the lack of real pain suggests we haven’t fixed anything. Maybe we just need to reserve ourselves to the idea that papering over our problems means a continuation of more frequent and bigger booms and busts. The business cycle on steroids I suppose. It’s just a reality it seems now.
It’s a little frightening isn’t it Ferro? I mean, I know a lot of people are still in pain, but aside from the rollercoaster in stocks I don’t think 80% of the population even knows that anything really happened. And make no mistake – nothing has changed. The boom/bust is alive and well. Unfortunately, the foundation appears to be weakening with each consecutive bust. My guess is we have another bust in the not so distant future. How big it will be I don’t know, but you’re certainly correct to assume that the busts are becoming more and more frequent….It’s going to take something really big to convince government that they can’t solve all our problems….
For sure. A few weeks ago I was looking at coporate (Aaa/Baa) yields as a % of the 10 yr treasury yield on a weekly basis through time. It wasn’t really for the purpose of developing a macro prognosticating tool, but just to measure the relative extremes we’ve seen in the economy dating back to the 1960s. The result was rather illustrative: without fail, corporate spreads at the top/peak of the economic cycle have gotten increasingly larger as a % of the 10 year as well as at the bottom of the cycle as they blow out…effectively, it suggests what you suggest, that the foundation has increasingly weakened over time with financial risk (again, measured by corporate spreads vs. treasuries) becoming greater at both the best and worst parts of the economic cycle…