Junk Bond Issuance Collapses in the US and Europe

At a breath-taking pace. Default rate spikes. US stocks at record.

Standard and Poor’s default rate of US high-yield corporate bonds – the more appealing moniker for junk bonds – jumped to 4.5% in July, the worst since August 2010.

But no problem. The S&P Distressed High-Yield Corporate Bond Index – comprised of 470 bond issues so troubled that they’re trading at a yield that is at least 10 percentage points higher than the Treasury yield – has rallied 48% since February 12.

This includes the 2.5% swoon on Friday, when some of the hot air was let out.

Default rates blowing out to crisis proportions while institutional investors are piling into distressed junk bonds and drive up prices despite soaring defaults – these are the kinds of out-of-sync movements that our era of interest rate repression, QE, and the relentless search for yield is becoming famous for.

And so, in the same out-of-sync manner, despite rising junk bond prices and falling yields, US high-yield bond issuance in July dropped 32% from June, to $14.9 billion, according to LCD of S&P Global Market Intelligence. For the first seven months of the year, total issuance plunged to $196 billion, down 32% from a year ago.

In Europe it’s even worse. According to LCD, high-yield issuance this year through July plunged nearly 50% year-over-year, to just €27.5 billion.

And here’s the conundrum in Europe: Corporate borrowing costs have dropped to a record low, repressed by the ECB’s negative interest rates and QE under which it scoops up not only government bonds, Asset Backed Securities, covered bonds, and as a German politician fretted so wisely years ago, old bicycles, but also corporate bonds. So by Friday, the average yield of investment-grade euro-denominated corporate bonds has dropped to an all-time low of 0.7%

According to Bloomberg, about 26% of the 489 corporate bonds the ECB has mopped up so far have negative yields: Free money for corporations; financial repression for investors.

Since the ECB started this in early June, it has bought €13 billion of corporate bonds. During the same period, companies issued only €19 billion of bonds. The ECB is also buying large quantities of government bonds and other assets from investors who then take this money and chase after the shrinking pile of the remaining securities.

But the ECB isn’t yet buying junk bonds, though surely, in addition to old bicycles, it will soon do so in its utter and rising desperation. But junk bond yields too have dropped in recent months, and yet issuance is drying up.

We know where a small part of this comes from: European energy bonds. They’re collapsing, investors are getting worried, and companies are having trouble issuing new bonds.

For example, in the second quarter, the trailing twelve month Nordic high yield default rate jumped to 12.4%, the highest since the second quarter 2010, up from 9.7% in Q1, driven by 19 default events (including 12 distressed debt exchanges). Much of the activity happened in the oil and gas sector: In June, the Norwegian Oil & Gas default rate soared to a record 34.8%, higher even than during the Financial Crisis.

In the US and the EU, oil & gas companies – except for the largest among them – are having trouble issuing bonds. But they had trouble last year too, and issuance had already plummeted in 2015 from a year earlier. So it doesn’t fully explain the collapse of junk bond issuance on both sides of the Atlantic.

Particularly interesting – and a warning sign: US stock markets are at record highs even while junk bond issuance has been grinding down this year, from an already lousy 2015, another one of those out-of-sync movements that are becoming symptomatic for our era of incessant market manipulations by central banks and their zero- and negative-interest-rate policies, QE, and financial repression.

So now, bond bull Gundlach makes U-turn and goes “maximum negative” on Treasuries – and just about everything else. Read…  “Stock Markets Should be Down Massively,” but Investors “Hypnotized that Nothing Can Go Wrong”

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  23 comments for “Junk Bond Issuance Collapses in the US and Europe

  1. Chicken says:

    Central banks have bought up all the quality debt, there’s a shortage.

    The force supporting the junk rally most likely has been central governments have no choice but to support them else they’ll be proven wrong and their hubris prevents reality from happening.

    By December, a wave of 150,000 Syrian refugees will arrive in Germany, and continue through for months to come.

  2. micromacroman says:

    They have dragged this out for over 7-yrs now. Could this finally be the final act before the fat lady sings ?

    • Chip Javert says:


      Well when the fat lady gets done singing, go kill her because we’re gonna need something to eat.

      Sarcasm alert over.

    • Oliver says:

      Yes, but it will take a lot longer than everybody thinks. There are sill bubbles that are not fully inflated … moral indignation and outrage, no matter how strongly they are held, do not produce predictons and forecasts.

      • Oliver says:

        Yes, but it will take a lot longer than everybody thinks. There are sill bubbles that are not fully inflated … moral indignation and outrage, no matter how strongly they are held, do not produce accurate or even useful predictons and forecasts.

    • nmstar says:

      I didn’t know Hillary could sing! Her normal, talking voice seems terrible enough.

  3. EVENT HORIZON says:

    WE have 6 months.

  4. chris Hauser says:

    issuance down 32%, now that’s of interest.

    • Oliver says:

      Yeah, maybe the corporates just don´t need the money. I don´t think this is necessarily an ominous sign of impending doom …

  5. Mark says:

    Wolf do you copy Michael or he does it to you?

  6. OutLookingIn says:

    “US stock markets are at record highs”.

    The S&P 500 is trading within a high narrow band forming a table top pattern. Which shows a fence sitting stance and a wait-and-see attitude. This could move in either direction very quickly. I imagine the PPT and the FOMC are on a moments notice to intervene if the move is down. Any downward retreat that carries large volume, will over power any intervention, including the CB’s printing presses.

    What is really frightening is the Nasdaq 100 which has gone parabolic and is pushing the charts up at a 90 degree angle. This is astounding! It cannot be sustained much longer. When it falls, it will be more of a toppling over, like a tall stack of children’s wooden play blocks. Again, no amount of intervention to arrest the fall will prevail.

    The coming crash will be historically epic.

    • MC says:

      Yes, that NASDAQ 100 is a thing for the ages and yet another proof of the “narrowing” that has been going on since May 2014.
      How long can it be sustained? For far longer than anybody looking for safe assets would like.

      The world has been piling into US assets. Some (housing for example) have become too expensive for most buyers and the correction has begun. Others (NASDAQ 100 for example) seem to know no limit but sooner or later even the wealthiest buyers will price themselves out, unless the Chinese find a way to flip foreign stocks like they flip houses in Sydney and Vancouver.

      What this tells us? That any attempt by US Federal Reserve to “thrash” the dollar and create inflation will be defeated by even crazier monetary policies abroad which will push foreign investors into US assets, which look like safe bets compared to the toxic waste they have to deal with at home.
      Which leads us back to the original issue.

      The monetary policies implemented by the ECB, the BNS, the Rijksbank and other European central banks had two closely related scopes: favor debt at the expense of savings and generate enough inflation to wipe out existing debt fast and without drawing too much attention.
      In both cases the policies have been resounding failures: debt has been generated but it seems to have reached a critical mass (apart from some isolated cases, like consumer debt in Switzerland and mortgages throughout Scandinavia) and it struggles to grow even further to fuel “growth” like it did in 2005-7.
      And while inflation does exist, it has slowed down considerably relative to 2003-2007. In short debt may be far cheaper to service but the principal is not being wiped out: that’s why the ECB has been buying it hand over fist and will soon double down upon it.

  7. Al Tinfoil says:

    While analysts continue to view the ECB and Bank of Japan programs of buying up enormous totals of government and corporate bonds as the latest iteration of “QE”, I wonder whether another viewpoint is useful:
    I am struck by the possibility that what we are seeing is the wholesale purchase of the private sector by the central banks. This looks somewhat like a Communist Central takeover with the central banks acting as the takeover agent for the banks’ owners. The “QE” purchase of government bonds freezes the private sector out of this market, just as the “QE” purchase of bonds issued by corporations freezes the private sector out of that market.

    As to shareholdings in corporations, the corporate practice of borrowing cheap and using the funds to buy up outstanding shares leaves many publicly-traded corporations with severely diminished net value when the bloated debt on their balance sheets is taken into account. The borrowed funds may be used to buy up outstanding shares to push up share prices and inflate earnings per share figures, or may be used to pay dividends to shareholders or bonuses to executives. The result is a corporation with a diminished net value of assets over liabilities (i.e. “hollowed out” and in hock to the holders of corporate debt issues.
    The executives and remaining shareholders make out like bandits from bonuses and elevated dividends (often paid out of borrowed funds), but the net value of many corporations is disappearing under mountains of debt. This looks like another branch of a Central Comintern takeover as corporate debt is concentrated on the balance sheets of central banks.

    If the central bank in question is a state-owned entity, the above analysis shows the takeover of the private sector by the state. If the central bank is a privately owned entity, such as the Federal Reserve or other Rothschild owned bank, then the rampant purchasing of bonds looks like an accumulation of corporate assets and even government assets in the hands of the very rich banking sector.

    • Julian says:

      Indeed, and what happens to companies that are crushed under insane debt and shareholders are wiped out as equity as squashed towards zero.

      Who then ends up owning these debt ridden zombies? Why, the bond-holders of course! Debt/Bonds converted to equity.

      How handy.

    • Richard Stockwell says:

      And that is exactly the way I read this. This is the Central Banks bringing about Socialism of the papal variety. Just read Francis’s notes about the world needing socialism so that everything is more equal. Trouble he never says anything about who will then be in control.

  8. Jonathan says:

    There are two kinds of people in this bizarro twisted financial market right now: People who has access to a free money printing press where the word risk doesn’t exist in the dictionary, and those who don’t.

    • DV says:

      I would expect buyers to purchase CDS on that debt. Even if they pay half of the yield on hedges, it is not bad. So money are made even on defaults. And given the shrinking supply of junk bond, yeilds may well be higher for those buying them up today.

  9. Chris says:

    Create more sovereign debt to buy more corporate bonds. Just keep creating money out of thin air to buy more bonds that are less than worthless as they yield negative returns. Shift the burden to the taxpayer as this debt is now theirs. All semblance of sanity has left the room. Now, all we have are ego-maniacal central bankers who actually think they can micro-manage the entire global economy. The next meltdown will be epic and terrible.

  10. Adolph Bosefski says:

    The proceeds from junk bonds and leveraged loans are rarely invested in productive activities these days, such as adding capacity or developing new technologies. Ironically, the few sectors that were investing the proceeds in productive activities – energy and metals mining – are in a depression and have been locked out from the junk bond market. It was a data set we didn’t need. Not one bit. It mauled our hopes. It mucked up our rosy scenario.

Comments are closed.