Read of the Day: Junk Bonds – So Popular They’re Dangerous

In a way, I guess you can say the Fed is having the impact they were hoping for.  At least when it comes to crushing the yield curve and inducing some borrowing.  But the funny thing is that the lending boom isn’t occurring in the sector of the economy where the Fed would prefer to see.  As regular readers know, the sector of the economy that most needs the help is the household sector.  But that’s not where we’re seeing the latest borrowing boom.  Instead, it looks like we’ve spread the recklessness to another sector of the economy. In this case, it’s corporations who are attracting all the debt.  In particular, very low grade corporations.  Here are some statistics via the CNBC article:

  • Junk-bond sales in the U.S. snapped the single-year record in October and have kept climbing. Sales for the year totaled $324 billion as of Nov. 28, according to Dealogic, a data provider. In the three years leading up to the 2008 financial crisis, a time marked by easy lending, companies with junk credit ratings sold an average of $144 billion each year.
  • Companies are lining up to sell bonds because borrowing rates have never been lower. The typical company rated “speculative-grade,” one of the polite names for junk, pays 6.6 percent to borrow in the bond market. The average over the past decade was 9.2 percent, according to T. Rowe Price research.
  • Demand for junk has remained strong. Individual investors, people saving for retirement or building a nest egg, have put $28 billion into U.S. junk bond funds this year while pulling $85 billion from U.S. stock funds, according to Morningstar.
  • Over the past 10 years, individual investors have dropped $96 billion into the junk bond market, according to a Vanguard research paper. The bulk of it, 77 percent, was deposited in the past three years.
And a bit more commentary that will make you fall in love with the Fed’s various policies:

Gitlin and others say recent trends remind them of the easy-lending era before the financial crisis, when Wall Street and bond traders treated caution as a sign of weakness.

“When you start seeing things like you saw in ’06 and ’07, you should be concerned,” Gitlin says.

Over recent months, more than a third of the money raised in the market has gone to corporate borrowers that credit rating agencies consider likely candidates for bankruptcy, those with the lowest of the low credit scores, according to S&P.

Read the full article at CNBC.

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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