It was enough financial upheaval for an entire year, but all crammed into a couple of weeks:
“Global market volatility,” the “debt crisis in Greece,” “China’s equity market plunge” and the chaotic “efforts to stabilize” it, “declining commodity prices,” “fresh shocks from Puerto Rico,” topped off with “an extended outage on Wednesday for the NYSE.” This is how LCD HY Weekly by S&P Capital IQ described the atmospherics of the US bond markets during the week.
It was when the booming if somewhat dented US bond markets took a broadside: Issuance of investment-grade bonds had seized up for the seven trading days in a row prior to Tuesday! In the junk-bond market, no new issuance made it to market at all this week, the first non-holiday week with zero issuance since July 2013, the peak of the Taper Tantrum. And in the prior week, only two deals for a measly total of $1 billion were priced. For all practical purposes, the primary junk-bond market has seized up.
Companies could have sold bonds. But in the chaos surrounding the markets, they would have had to offer a higher yield than anticipated, and deals were put on hold, pending better times.
This chart shows how junk bond yields spiked during the Taper Tantrum in the summer of 2013, as the market grappled with the until then inconceivable idea that the Fed would taper QE out of existence. This blew over, and the high-yield market returned to the halcyon days of yore. But in the summer of 2014, oil began to crash. This time it was energy companies that dragged down bonds. Yields spiked to 7.59% by December. It too blew over, sort of, but since June 1, new pressures have been building up:
And now this debacle: a week during which no junk bonds came to market. During the same week last year, eight junk-rated issuers sold in total $6.78 billion in bonds. Year-to-date, $185.7 billion in junk bonds have been issued, down 2.5% from the same period last year, the first time since early February that sales have dropped below last year’s pace.
“Things are on hold. Higher quality stuff can get done at a price, but no one wants to do that,” a head high-yield banker told LCD.
On the investment-grade side, the door cracked open on Tuesday, after a no-deal period of seven trading days, with $30 billion in bonds issued since then, including Charter Communications’ senior secured six-tranche offering for part of its Time Warner and BrightHouse acquisition. But Charter’s junk-rated portion of about $3.5 billion got hung up. It might hit the market next week, “depending on conditions.” But “one source” said that there was no urgency and that it could be brought to market as late as September.
While waiting for better times, eager issuers put deals on the “shadow calendar.” Eldorado Resorts on Wednesday announced a $375 million offering of 8-year senior notes, though “timing remains uncertain.” Four other issuers – TerraForm Power, My Alarm Center, Georgia Renewable Power, and Globo Mobile – put offerings of nearly $1 billion on the shadow calendar, with timing “still uncertain.”
Alliant Insurance’s bridge loan – part of PE firm Stone Point Capital’s acquisition of a 50% stake in the company – is “facing headwinds amid the current market weakness,” and the bond offering “is likely on hold until the end of the month, sources say.”
But despite “the crush in commodities prices and other headwinds this week,” the secondary high-yield market, where already issued junk bonds are trading, “held up fairly well.”
There were “mixed signs,” and “many widely held par names felt pressure and traded lower in spots,” LCD said. But Thursday, the mood changed. Stocks in China soared. Then they jumped in Europe, and finally in the US though they later lost most of their steam, and commodities bounced off, and the feeling spread that the world wouldn’t for now fall off a cliff.
It encouraged a “modest bounce” in “recently damaged” junk bonds, especially commodities bonds, even as Treasuries sold off sharply.
“Patience is a virtue right now,” a salesperson told LCD. “Holding cash as one searches for dislocations in prices of good credits will pay off.”
It has been the most phenomenal bond boom in history: $891.4 billion in bonds were issued at historically low yields during the first half, up 7.5% from the same period in 2014, itself a record year, according to the Securities Industry and Financial Markets Association (SIFMA). But nearly all of the growth this year was in investment grade bonds. Junk bonds have had a much harder time this year as investors are beginning to grapple with a sense of reality, and in this reality they’re suddenly seeing has some ugly nuances.
But these numbers don’t include the debacle of July, when the primary bond markets seized up, and where uncertainty now reigns. And over-leveraged, junk-rated Corporate America is going to have a harder and more expensive time playing its games with borrowed money. Investors beware!
One of the companies whose junk bonds got hammered this week isn’t even in commodities or energy, but in the semiconductor sector: Advanced Micro Devices. Late Monday it said that its revenues would drop sequentially 8% in Q2, instead of 3%. It blamed lousy demand for consumer PCs. Its shares have since plunged 20%. And its 7.75% notes due 2020 have dropped over 7% from 86 cents on the dollar to as low as 79.5 cents on the dollar. Investors are smelling a rat.
But AMD wasn’t the only tech company with this problem, as hope took a hit from the fickle, strung-out consumers. Read… The Chilling Thing Gartner Just Said About a Once Hot Engine of Global Growth
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The sand is in the gears. Only a matter of time til the drive train seizes up.
Yes, but since the 1999 tech bubble. Or we could go back to 71 when we went off gold for international trade. Or maybe 1964 when we defaulted on silver for the people. Or 1933 when we defaulted on gold for the people.
One thing I have learned watching this process since 2008, when I got burned the second time and started spinning up on banking/finance/etc was that this can be drug out for a very long time when there is not REAL market. All sorts of imbalances can accumulate in the system, but the rules get changed. It is like I am drinking a nice pint, and as the glass gets less full the volume associated with a pint gets smaller, so my beer stays at one pint for the ride! Science and engineering could never function in this way, but this is the norm for finance and banking.
Today, everything is an illusion and it goes on until it doesn’t. Sure, it will end in time, but so too will I be dead. Having no idea when isn’t that particularly useful. This is going to be a long process and I don’t even buy into the “collapse” stuff thrown around anymore. I expect a long slow grind into abject poverty for most in the Western world.
If the Greek PM goes back to the EU hat in hand and signs off on whatever they want him to sign off on (which appears to be what he was going to do all along – he just screwed up and did a referendum and did not expect a landslide NO outcome which makes him now look like a real ass), then the puppet masters will beat misbehaved prices back in line for some time longer.
Defaults are going to happen, but in semi-controlled terms per the elites need to inflate them away … so the costs are born by the masses.
Personally, the entire western developed world is Greece and the ratios of old to young are going more out of balance as time goes on … so I kind of see this as a trial balloon for how the bigger countries are going to get handled. Cyprus was an exercise in handling a banking shutdown and Greece is an exercise in a pension shutdown.
Regards,
Cooter
Good points as debt is either paid off or defaulted.
That said banksters nightmare is string of defaults hitting their balance sheet so they go on pretending that the bad loans are being serviced even though debtors are bunch of deadbeats and debt won’t be ever paid off. (illiquid asset). This is important as banks’ solvency is tied to it assets so they extend and pretend that non-performing loans are somehow “performing”.
Next up is the Fed to the rescue again in mother of all TARP to buy bad debts from the banks. So in essence privatize the gains and socialize the losses to citizens.
Exactly. They **have** to **inflate** to keep their assets “numerically” good and the brunt of suffering that comes with this form of default is born by the masses. Deflation would destroy the banks and they are too politically connected for that.
Thus my comment “Defaults are going to happen, but in semi-controlled terms per the elites need to inflate them away … so the costs are born by the masses. ”
Pay close attention to Greece, because “we are all Greeks now.”
Regards,
Cooter
A long slow decline is a good bet, but never rule out the ability of people to go into PANIC. And the Black Swan that nobody can predict. Look at Facebook or Uber. It’s not like social media or taxis didn’t exist before. They just tweaked the model a bit and it quickly changed the world.
So you say there’s chaos in the world of make believe ?
The entire bond market is a junk bond market. The incomes of consumers are not there to support the revenues the companies need to pay back the debts. Consumers are cutting back everywhere. When my cable bill goes up next year, at the end of the promotional period, I will be saying good by to cable, and the landline too. The only traveling we do is to attend funerals. I’m not buying anything I don’t need. Blue chip America outsourced itself out of existence.
I agree Cooter that it can go either way. I thought it would have blown up before now, and have given up trying to guess when. The fact remains: like Petunia I am hunkered down and will STAY hunkered down. As soon as I drop my guard I’ll get plastered, and I’m too old to recover from the next crash. If it doesn’t crash before I’m dead I will coast along as I have been. I’ll pay off my remaining debt and not take on more. I believe we are past the point of no return; that whatever political ‘fix’ gets tried nothing will bear fruit until the whole crooked system gets swept away. We have Japan as a concrete example that you could be absolutely correct, and Venezuela as a concrete example that I could be. We will be in limbo til one or the other occurs. We are Schrödinger’s Cat for the time being.
It sounds like I am a bit younger than you, but I am doing the exact same thing as you (and Petunia) are doing.
Best of luck and keep yer chin up!
Regards,
Cooter
What a lot of people commenting don’t realize is that a financial crisis won’t just keep going like a financial perpetual motion machine.At some point this sorry business will pass out of the hands of the financial sector & become political.
This is what happened in the Great Depression of the 1930’s.
The Economic hardships were a driving force in the rise of Imperial Japan & Nazi Germany .The depression brought about great political changes which would never have happened otherwise!
In some respects a financial collapse in Greece would mirror a somewhat similar situation in Russia in 1917. The Kerensky government was caught in an impossible situation,the whole country was coming apart & the government did not survive.The Bolsheviks took over & somehow,with great bloodshed & pain, the nation survived.
If Greece leaves the EU it will survive & turn the corner somewhere. While this is happening the rest of the EU is suffering financial dislocation as well.This financial affliction is pushing Europe into broad based poverty.Poverty which will not be tolerated by the European masses.
I believe that a combination of economic hardship & revived class hatred of the upper classes by the working classes will burn the EU,with the bankers,to the ground!
Thanks Cooter. John, in the world of make-believe(subjective reality) all is unicorns and rainbows. Fox News was saying so just this morning. In OUR world all is chaos (objective reality). The chaos won’t happen in their make believe world until reality in no uncertain terms impinges on their world.
Alas it sounds like QE to infinity liquidity out of global CB cabal firehoses are trickling down. That there is RISK when you get ZIRP money from CB and invest in junk bonds? That the great commodities orgy driven by insatiable Chinese demand (and pledged to multiple banks for loans using same collateral – another story) is slowing down the BRICS and some emerging markets?
Say it ain’t so as the world believes that it is different this time and CBs have plenty of ammo left for next leg down?
Pardon me to interrupt but are we talking investment or savings banks? Think about that for a while.
Yes but it there really some kind of difference since Glass-Steagall Act was repealed and some say the repeal of GSA ushered in the 2008 banking debacle?