Displaying items by tag: default

(New York)

The debt clock is reading ten minutes to midnight for Congress which seems gridlocked in a game of chicken that could cost the public. Goldman Sachs issued an internal note late last week that there is a material risk that congress fails to reach a consensus on increasing the debt limit. Mitch McConnell is currently reviewing two plans to present Dems that would allow them to reach a consensus on raising the debt ceiling. Treasury Secretary Yellen reiterated that the government will be cash poor to pay the bills if Congress fails to raise the ceiling. Some are calling for the Treasury to mint a $1 trillion coin in order to finance if Congress doesn’t raise the debt ceiling but Goldman says this scenario is unlikely.

FINSUM: Congress always comes around to raise the debt ceiling, but a new wave of Democrats and Republicans pose new risks that a mutual agreement can be met.

(New York)

Credit rating agency Moody’s has just put out a broad and scary warning to investors: when the economy turns around, we have may have a junk bond crisis on our hands. Moody’s says that there will be widespread junk bond defaults in the next recession stemming from huge issuance and heavy indebtedness. With rates so low following the Crisis, indebted companies issued hugely risky and burdensome debt that was eagerly gobbled up by investors. According to Moody’s “The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives”.

FINSUM: All that issuance was always going to come back to bite. Credit-worthiness was low and investors gave up a lot of safeguards. It seems inevitable the bill will come due.

(Rome)

Well it just happened. The two alternative Italian parties—the Five Star movement and the League have just formed a coalition government to govern Italy. The new PM of the country will be Conte, a very inexperienced politician who comes from a legal and academic background. According to the WSJ, “Matteo Salvini, the 45-year-old leader of the League who pledged to deport hundreds of thousands of illegal immigrants, will become interior minister”.

FINSUM: There is now a strongly anti-Euro and anti-EU government in power in Italy. A default and a devolution to the old Lira are entirely within the realm of possibility.

(Rome)

For those who consider themselves students of the market, yesterday was a real whopper. Short-term bond yields can usually be seen as a proxy for cash. But in a truly astonishing move, Italian two-year yields rose an amazing 1.5 percentage points yesterday (150 bp) to 2.4%. By comparison, other southern European yields, such as Spain, moved just 12 bp. Markets are worried about a massive Italian default, and possibly the redenomination of bonds into Lira.

FINSUM: When you get right down to it the panic here is not just about a default, but about a breakup of the Euro. We have always said it would be Italy to leave first, and the major question is whether others would join them when that happened.

(New York)

Any financial advisor will tell you that most of their clients love muni bonds. The asset class has been very popular for many years among the wealthy because of the bonds’ tax exempt status. Therefore, advisors need to pay attention, as there is a little discussed, but very real ticking time bomb in the asset class. That big time bomb is unfunded pension liabilities. The projections made fifteen years ago may have been plausible, but with a financial crisis and then years of rock bottom rates, many think state and local pensions have reached a point of no return which will lead to major defaults. Barclays’ munis team recently noted “We are increasingly wary of high pension exposure, especially among state and local credits”, continuing that “short-term investment gains won’t be sufficient to plug liability gaps”.

FINSUM: There is bound to be a big wave of defaults in the muni space. This is a big and slow-moving crisis that nobody, especially the federal government, wants to deal with.