Displaying items by tag: credit

(New York)

Anyone who pays attention to the bond markets will know that there has been an extraordinary run up in BBB rated bonds since the Financial Crisis. From just $700 bn worth of bonds in 2008, to a whopping $3 tn now. Using the metaphor that such bonds, which are just one rung above junk, are like the dead trees and limbs in the forest before a fire, Barron’s is predicting big problems. The trigger is likely to be the next recession, which would cause many BBB bonds to fall down into the junk category. This would spark mandatory selling by many funds, leading to sharp losses for investors. What’s worse, such bonds, at an average yield of 4.3%, are not compensating investors for this risk, as they have only a 60 bp spread to A rated bonds.

FINSUM: There are bound to be a lot of fallen angels and losses in the next economic downturn. As one analyst summed it up, “With all this dry tinder lying around, it wouldn’t take much to set off a raging fire”.

(New York)

The current rate environment has put investors in a pickle. How does one protect short-term income needs while also protecting against interest rate risk? One important factor is to remember is that one can balance short-term losses by holding bonds to maturity, so stringing together groups of short-term bonds can be a solid risk-mitigating, but yield-maximizing strategy. There are a number of funds to look at to make managing the situation easier. These include the Lord Abbott Short Duration Income Fund (LDLFX), Transamerica short-term bond (ITAAX), and the Nuveen Short Duration High Yield Municipal bond (NVHIX).

FINSUM: It is a difficult fixed income environment right now, with corporate bonds broadly in the red for the year. A well-crafted and balanced strategy is a must, and given that short-term bonds currently have strong yields and less interest rate risk, they seem like the best bet.

(New York)

One would think that 2018 is the perfect time to boost lending to consumers. The economy is strong, the job market is robust, and things are generally humming along nicely. Think again, as US banks are worried about US consumer credit quality and are starting to reign in lending. Bad debt is rising and so is the amount of bad credit banks are having to swallow. Beyond just fundamentals, the competition to lend has made the market uber-competitive, which heightens the risks for lenders because of weaker terms.

FINSUM: Consumer credit is tightening its belt across the board as credit balloons and standards fall. We wonder how much this tightening might impact the economy over the next year.

(New York)

One the biggest and most conservative asset managers on the street has just put out an ominous warning to investors. Vanguard has just told investors that a near term recession (by 2020) is looking more likely. The asset manager is worried about the flattening yield curve and rising credit risk for sub-investment grade bonds. Vanguard says the odds of a recession in the next six months are 10%, and 30-40% by the end of 2020. The comments are unusual for Vanguard, who has stayed positive on the economy and is usually very conservative in calling markets and the economy.

FINSUM: Our own view is that the chances of a recession by the end of 2020 are much higher than what Vanguard is calling for.

(New York)

It is no secret that credit has expanded mightily in the last several years. The investment grade corporate bond market has completely ballooned, but leveraged loans have been another important area of growth. And while the risk of IG corporate bonds is well understood, the risks of the latter are less apparent. Leveraged loans are popular right now because they have floating rates, but those rates are a big risk. The reason why is not in the extra payments themselves, but because most leveraged loans are issued to refinance existing debt. The issue is that when corporate borrowers come back to the market to refinance, they might find many less lenders and much higher rates. The is so because as rates rise, other safer asset classes become more attractive.

FINSUM: The whole corporate sector has been binging on low rates for years, and there is bound to be a reckoning. The scale of that reckoning is the big question.