Displaying items by tag: credit

(New York)

Yields on the ten-year Treasury note crossed the 3% threshold this week and seem set to stay there for some time, sparking a big change in bond markets. Bloomberg argues that yields at this level change everything for all asset classes. The reason why is that a jump in yields to above 3% starts to cause a shake out amongst highly indebted companies, boosts the Dollar, and in turn, makes emerging markets less attractive.

FINSUM: To be honest, our biggest concern was not even discussed by Bloomberg, which is how higher yields affect the arithmetic for whether to put money in richly valued stocks, or into bonds that are starting to offer acceptable returns. 3%+ yields really could put an end to this bull market.

(New York)

While the housing market has been doing well and credit markets still look solid on a fundamental basis, there is big trouble brewing in US housing. The proportion of highly indebted mortgage borrowers is surging. Fannie Mae recently increased the amount of total debt as a proportion of income it allows for federally-backed mortgages from 45% to 50%. Rising house prices and stagnant incomes mean that 1 in 5 mortgage borrowers now have 45% or more of their pre-tax income eaten up in debt every month. That is triple the same proportion of borrowers compared to 2016 and the first half of 2017.

FINSUM: The mortgage market has been running out of prime borrowers, and in response, the proportion of subprime borrowers seems to be rising, though this is being accommodated by increased federal support for such mortgages. Are we headed down the same road again?

(New York)

The US credit market has not exploded, but as yields drift higher, the situation is worsening. High yield is seeing yields and prices back to where they were in 2016, though not quite as bad as in early 2016, which was the last time there was an equity market correction. There are big worries about the huge ($2.5 tn+) pool of triple B bonds, which look vulnerable. Triple Bs now account for half of the US investment grade market. The good news is that corporate earnings are in good shape, which means credit-worthiness is still strong.

FINSUM: We think fears about the credit market are a little overblown at the moment. Earnings and credit-worthiness are still strong, and there is going to be good demand for decent yields, which should keep things in a band.

(New York)

While there are a lot of concerns about the bond market right now, one of the risks that is being ignored is credit quality itself. Well, there might be a bomb set to go off in credit. In particular, there appear to be major risks in the Triple BBB category of bonds. This group is considered investment grade, but only just so. There are currently $2.5 tn in US debt with this rating, double the level of five years ago, according to Morgan Stanley. MS says that in a downturn, investors may abandon this type of debt, raising rates for the borrowers, and in turn exacerbating the economic contraction. All of which seems likely to hurt the stock market.

FINSUM: This part of the bond market is so huge, that an exodus from this area would greatly wound the economy.

(Atlanta)

The type of loans that fueled the Financial Crisis are making a comeback in a big way. Issuance of subprime mortgages is surging once again, with the total volume of loans issued in the first quarter doubling from a year ago. Such issuance fell to almost zero in the years after the Crisis, but specialist lenders have sent it surging yet again. The loans have been very popular in the debt markets as investors have been snapping up the loans. “[Investors] are definitely chasing yields. Whenever these deals come out, for the most part, they are oversubscribed”, says a New York hedge fund.

FINSUM: This is a bit worrying, but given how low the starting base for the market is, this is just not big enough to be a concern, yet….