Displaying items by tag: credit

(New York)

One of the best ways to watch the damage to the economy is to monitor the performance of consumer debt. Auto loans, student loans and beyond give a clear indicator of the health of American finances. Right now, the data is looking bad, reinforcing why this might be a long and difficult recovery. According to the WSJ, “Americans have skipped payments on more than 100 million student loans, auto loans and other forms of debt since the coronavirus hit the U.S … The largest increase occurred for student loans, with 79 million accounts in deferment or other relief status, up from 18 million a month earlier. Auto loans in some type of deferment doubled to 7.3 million accounts.  Personal loans in deferment doubled to 1.3 million accounts.” The total of deferments is triple the number from the end of April. Lenders, who have generally been accommodative to this point with borrowers, expect delinquency to soar later this year.

FINSUM: You cannot have 50m people—roughly a third of the US workforce—lose their jobs and not have any repercussions. This is the kind of data that makes stock indexes look rather ludicrous right now.

(New York)

Big debt investors are pouring dollars into risky debt markets and products, such as CLOs and their subprime-backed assets. Why you may ask? (as anyone might right now) The answer is that the riskiest borrowers are surviving this downturn much better than anyone expected. Spreads between subprime-backed products and US Treasuries have narrowed sharply, while new deals have seen big demand. According to an analyst at Loomis Sayles “What is surprising is how strong credit performance has been … Fiscal policy is really keeping the subprime borrower afloat”.

FINSUM: Regardless of whether or not you are involved in this market, it is good news that the demand for these securities is actually being driven by fundamentals. It is both a sign of economic resilience, and also of market rationality.

(New York)

One of the aspects of this bear market that has really alarmed investors is the speed with which the market has rallied from its lows. Huge gains of well over 35% have shocked investors into feeling like indexes are bound to fall again. In some sense that sentiment makes sense since it has happened before, such as in the dotcom bubble. However, according to BlackRock, it is absolutely time to go risk-on, but with a twist. The asset manager says that sovereign bonds have very little upside or protection to offer right now, so instead investors should put their capital into credit and higher-quality equities. “Over the next six to 12 months, we favor credit over equities given bondholders’ preferential claim on corporate cash flows and prefer an up-in-quality stance in equities”.

FINSUM: We particularly like the argument about sovereign bonds not offer much right now. With central banks already at their zero lower bound and sovereigns priced very highly, there is just not much to gain and plenty to lose.

(New York)

New York is the epicenter of the US coronavirus crisis, and the hit it is taking to its finances may be an example of the risk that the muni bond market is facing all across the country. Government revenue is taking a huge cut at the same time as expenditure to support the economy and its people is jumping. While the threat of a downgrade from its AA perch is only moderate, New York does have several other muni issuers that are looking much more dangerous. For example, the Metropolitan Transit Authority (MTA) and the Transitional Finance Authority (TFA). The MTA, which runs the subway and other forms of public transportation, has taken a massive revenue hit during the lockdown, with ridership down 90%.

FINSUM: Certain muni credits are gong to be devastated. For instance, even though the MTA is getting $4 bn from the recent CARES act, it is still yielding 5% versus the 2% it yielded before the Covid eruption.

(New York)

Any investor cannot help but have noticed very unusual movements in markets over the last couple of weeks. In particular, Treasury bonds have been behaving very oddly. After yields predictably plunged alongside stocks a couple of weeks ago, there have been abrupt movements higher, with 10-year yields rising around 90 basis points (from 0.4% to 1.3%) in just a few days. Even now, when yields would presumably be nearing zero, they have been see-sawing and are still near 1%. The reason why appears to be panic-selling in an effort to get cash in any way possibly. In particular, large investors need to meet redemptions in other areas of credit, which are much less liquid, and since getting cash for their holdings there is impossible right now, they are selling Treasury holdings to get the cash to meet redemptions.

FINSUM: This is not unlike selling your valuables to meet mortgage payments. It makes sense, but it is a worrying sign and a symptom of how dire the market has gotten.