Junk Bond Yields Hit Record Low: Most Distorted Markets Ever

Well, not markets. Fed-managed paper exchange.

By Wolf Richter for WOLF STREET.

Never mind the Pandemic or the huge blob of corporate debt that even the Fed publicly fretted about before the Pandemic, only to do everything it could to fatten up this huge blob of corporate debt even further during the Pandemic. And never mind the credit risks – the risk of default and bankruptcy – that this corporate debt poses. And never mind that entire over-indebted industries saw their revenues collapse. Come to mind airlines, cruise lines, mall retailers, mall landlords, restaurant chains, hotels, hotel landlords, movie theater chains, or of course the entire shale oil-and-gas sector. And just don’t worry about the risk of inflation and the existence of inflation. Just never mind any of this, because, I mean, it just doesn’t matter: Junk bond yields have dropped to a record low.

To wit: the effective yield of the ICE BofA US High Yield Index, which tracks US-traded junk bonds across the junk-bond spectrum, fell to 4.61% at the close on December 3, the lowest in history. As bond yields fall, bond prices rise:

The surge in yields back in 2015 and 2016 was largely the result of the shale oil-and-gas industry getting ripped apart by the Great American Oil Bust. The price of WTI crude oil had plunged from $110 a barrel in mid-2014 to below $30 a barrel in early 2016, triggering a wave of defaults and bankruptcies. The Fed, which had just started raising rates in December 2015 with its first tiny rate hike in a decade, started worrying about contagion and halted the rate hikes for a whole year, during which the junk-bond market began to settle down.

Then in 2018, as the Fed was raising interest rates and unwinding QE, junk bonds started quaking in their boots again. The headliners were the brick-and-mortar retailer meltdown, the oil-and-gas sector, media companies, and lots of others that just had too much debt. Yields spiked in mid-December, when the Fed raised rates despite hopes that it would back off. But then the Fed also started backing off its guidance for rate hikes in 2019, and in July 2019, it embarked on rate cuts, and the junk-bond turmoil settled down.

In September 2019, another corner of the credit market blew up, this time the repo market, and the Fed piled into repurchase agreements, in addition to another rate cut, to keep some big mortgage REITs and hedge funds that had massively borrowed in the repo market from imploding and spreading messy stuff around Wall Street. But the repo market blowout had not impacted the junk bond market, which watched from a distance. And by early 2020, junk-bond yields were in record-low territory.

Then in March 2020, the Everything Meltdown caused junk bond yields to spike, with the ICE BofA High Yield Index more than doubling in a month, from a record low yield of 5.02% on February 20th to 11.38% on March 23rd.

And the Fed threw everything it had at it to bail out the investors and speculators holding those bonds. This included a purchase program of corporate bonds and bond-ETFs, including junk bonds and junk ETFs, that had been touted as a $700-billion program, when in fact, the Fed ended up buying just $13 billion in corporate bonds and bond ETFs. It stopped buying ETFs in July and has been buying just a trickle of bonds. The program is set to expire at the end of December.

So the junk-bond market goes from blow-up to Fed bailout to blow-up to Fed bailout. This goes back further. During the Financial Crisis, the junk bond market blew out royally, and froze up, and the Fed unleashed all its fury to settle it down, which included numerous bailout programs – an entire alphabet soup of programs – and years of QE. The chart below shows the longer-term perspective of the ICE BofA High Yield Index:

Every time the Fed bails out the credit markets – and the investors that hold and trade that paper, and that speculate with that paper often in highly leveraged complex trades – it causes more corporate debt to be built up. Instead of allowing corporate debt to be shed via bankruptcies and debt restructurings, at the expense of those investors, traders, and speculators, the Fed is creating an environment of free money that exhorts companies to borrow even more. And then the even greater debt hangover bogs down the economy during the Good Time while everyone is waiting for the next blowup so that the Fed would rescue them again, turning the whole thing into a Fed-managed paper exchange.

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  114 comments for “Junk Bond Yields Hit Record Low: Most Distorted Markets Ever

  1. Absur Ditty says:

    Supply of dollars up what, 30-40% this year? And zero political consequences to slow it down.

    And junk bond below 5%!

    OK so buy junk bonds then, right! YES! Obviously when the monetary inflation rate is 40% you get rich collecting 5% interest from companies likely to die in a few years, right? I’m switching ALL my assets to junk bonds right now!

  2. Micheal Engel says:

    1) Come to mind the utilities co.
    2) Residential and small businesses could owe as much as $40B to their
    utilities providers by March 2021.
    3) The high debt utilities diminishing revenues and write offs might lead to losses.
    4) Climate change regulations lead to expensive redundancies,
    inefficiencies and blackouts.
    5) When Rome aqueducts, – supplying water from far away – were dissected by Rome enemies inflation and dehydration forced Rome residents to flee the city.
    6) Between June 1926 to Sept 1929 utilities were up 326%.
    7) between Sept 1929 to June 1932 utilities were down 82%.

    • Petunia says:

      The recent flooding in the interior suburbs of south FL are a case in point. If you don’t pay your sewer bills, they don’t pump out your sewers. A new inconvenient truth in the global warming agenda.

    • WSKJ says:

      Thinking about interest rates…..

      Micheal Engel, I like your point 5. According to a quick google search, the Ostrogoth King Vitiges, realizing the importance of water supply to Rome, did some aqueduct destruction in 537 A.D. .

      Going a bit further back, to roughly 0 A.D., we find in the New Testament of the Bible (see Matt. 25:27, and Luke 19:23) what is known as the parable of the talents: a rich man has to be away from his head office for some time, and he entrusts “talents”, or “money”, or “pounds”, (depending on your translation), in differing amounts, to his servants. On his return, he finds that the 10-pound servant has doubled his money, yay !, and so on…….but the 1-pound servant went and buried his pound (think monetary metals) and gives the single pound back, probably dusty.

      The rich man is angry, and speaks sternly: “If you had deposited my pound at the bank, I could now withdraw my pound WITH INTEREST !!”

      He takes the pound and throws the servant into debtor’s prison.

      Hmmm, yes, debtor’s prison.

      At different times in history, this story is employed to emphasize different points. What jumps out at me at the present time, 2020, is that the smallholder can no longer deposit his savings “at the bank”, and earn interest (He will get ZIRP, more or less). This cog in the workings of the global financial mechanism (wheels within wheels; gears, flywheels, whatnot) has been knocked out .

      The FRED’s proposal of Credit Cylinders (Cf. Max Headroom) and their proposed dispersal of Credits comes from their vague awareness that they have knocked out a cog which has always been considered an essential part of global financial. Incipient guilty awareness is dawning.

      My small 3% Certificate of Deposit at my credit union expires Feb. 12; I will not be renewing at a new negligible, read ZIRP, rate. What hath FRED wrought ?

      • Memento mori says:

        Economic life is not dominated by national purposes but by collective impulses originating in fantasy and myth. While producing is the outcome of a rational process, consuming depends on irrational impulse similar to the erotic impulse. Fantasy is the true incentive to economic progress: the progress of science and technique has resulted in enormous increase of the part assigned to fantasy in human life. Literature, art, newspapers, movie theaters, radio, television, internet, are “dream factories” and so are the modern hotels and the tourist business. Modern economy is as much a dream factory as Hollywood. It is based for a small part on real needs, for the greatest part on fantasy and myth. Hence the central role in modern economics of the advertising business.
        The stock exchange itself has a mythical function; it is not the “brain” but rather the “heart” of economic life, compensating for the pressures endured by homo economicus in his relentless striving toward rational organization , order, and thriftiness, and the exactingness of bookkeeping, computing and the setting up of balance sheets. The stock exchange is the only window through which daydreams can enter the life of such a man. At the same time the beliefs, expectations, and desires of numerous men are projected and converge on the Stock Exchange. Far from ruling economic life, the stock exchange is itself at the mercy of the tides of collective fantasies ; depressions come about when there is a sudden loss of economic myth. Fantasies can change on a whim, but right now the trend seem to be on getting rich quick and easy, this market could go much higher.

        • max says:

          beautiful and intelligent writing with many half truth —”too smart by half” comes to mind

        • urblintz says:

          Guy DeBord’s “Spectacle”

        • Engin-ear says:

          @Memento mori
          @urblintz

          MANY thanks.

          Never heard before.
          Apparently it was written in 1967.

          Will be my next reading.

      • WSKJ says:

        Wish I had all day to research the fine points of my comment:

        Important: “debtor’s prison” may belong in a different parable.

        In the parable of the talents, we are talking “outer darkness”. Probably worse.

      • Fat Chewer. says:

        Thank you for saying this much more eloquently than I ever could. You are absolutely correct.

        • pete says:

          I have always tried to live by the ‘Parable of the Talents’ by investing for the future, but sometimes, these days, the good padres interpret that landowner as the devil of commerce.

          Oh and buy bitcoin with those expiring CD’s.

          Good luck…PJS

        • Zantetsu says:

          pete, how does one buy bitcoin, exactly?

          What are the trusted exchanges?

          Bitcoin is a commodity that you can theoretically hold yourself, in a file on your computer. I know this because I bought 3 bitcoins back when they were $30 apiece and later sold them for $600 apiece.

          However, the mechanisms for holding and transacting with bitcoin are very unnerving. Holding a file that can be stolen by hackers is frightening. I myself lost about 2/3 of a bitcoin back in the day because I was experimenting with using the bitcoin client and I somehow sent a ton of transactions off to never never land, and that fraction of a coin was lost. Funny to think that what I lost in playing around is now worth over $10,000.

          I have a hard time believing that bitcoin exchanges can be trusted. They are not well regulated and the whole thing is shady. It’s what’s kept me from ever investing in bitcoin since the good old days of 2011.

          Also there’s the fact that bitcoin design is beautiful but fundamentally flawed in that its computational cost of verifying transactions across the network is by design so expensive as to cause transactions to be hugely expensive and very slow. Has bitcoin ever gone over 10 transactions per second? It’s a joke.

          And don’t talk to me about lightning. That’s a joke too, it’s technically flawed and if people are using it, it’s because they don’t mind trusting a technically flawed system “as long as it seems to work”.

  3. Memento mori says:

    That which is contrary to our wish, we cannot perceive.
    Interest rates are going to be repressed at those levels for longer than we think, while inflation will be our nemesis for the foreseeable future.
    People getting into hard assets have good instincts.
    Trillion will become the new billion pretty soon.
    These violent delights have violent ends, we know how this ends, the people in power do, but destiny cannot be stopped.

    • Rcohn says:

      Although I agree that precious metals are currently the only viable investment, I am also very aware that the EXECUTIVE ORDER #6102 required all people to deliver their gold to the FED by May,1933 While it may be true that few people did so,I am also aware that MAO said that “political power grows out of the barrel of a gun” and that the current government (Dem or Repub) will not be shy about using force to enforce laws.

      • TBD says:

        Something much more powerful is going to sweep the US government and likely all governments out of the way. They are not going to be able to enforce much in a 100 years….only violent crimes and social/family matters… ……financial crimes/flows will be completely untraceable in the world coming and for that it will be a much better world.

  4. MonkeyBusiness says:

    I hear we live in a democracy.

    • ChrisR says:

      Strictly speaking we do. But not one which insulates the country from legal corruption, political corruption and economic corruption.

      So much so, me, you and everyone else gets to vote to keep people in power who prosecute such actions on a daily basis, “for your own good.”

      • Petunia says:

        Yesterday, our former presidents out campaigning for big pharma was really something. Brutus, Cassius, and Decimus celebrating on the ashes of the empire. Of course, for our own good.

        • MonkeyBusiness says:

          Reminds you of that time when Obama drank some Flint “water”.

          Speaking of the vaccine. Pfizer chairman Albert Bourla told Dateline host Lester Holt that the pharmaceutical company was “not certain” if the vaccine prevented the coronavirus from being transmitted.

          LOL.

        • paul easton says:

          And the Frump is imitating Nero. He doesn’t even get paid for that. He is simply an enthusiast.

      • MonkeyBusiness says:

        TLDR. Lazy muppets make a poor democracy ;)

      • James Charles says:

        “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens
        Martin Gilens and Benjamin I. Page
        Each of four theoretical traditions in the study of American politics—which can be characterized as theories of Majoritarian Electoral Democracy, Economic-Elite Domination, and two types of interest-group pluralism, Majoritarian Pluralism and Biased Pluralism—offers different predictions about which sets of actors have how much influence over public policy: average citizens; economic elites; and organized interest groups, mass-based or business-oriented. A great deal of empirical research speaks to the policy influence of one or another set of actors, but until recently it has not been possible to test these contrasting theoretical predictions against each other within a single statistical model. We report on an effort to do so, using a unique data set that includes measures of the key variables for 1,779 policy issues. Multivariate analysis indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism. “
        https://scholar.princeton.edu/sites/default/files/mgilens/files/gilens_and_page_2014_-testing_theories_of_american_politics.doc.pdf

    • FF created a Republic, Lincoln created the Union. The aegis of the old Republic, agrarian America, disappeared 100 years ago. Morality follows technology. With stone age technology, only the chiefs had the tools, now everyone has the tools. As long as some people have more votes than others the two systems are incompatible.

      • Dan Romig says:

        Agrarian America lives on. As a percentage of the population it is lower, but it most certainly exists.

        I like Wolf’s comment about the yo-yo effect of the Fed’s manipulations: “So the junk-bond market goes from blow-up to Fed bailout to blow-up to Fed bailout.”

        • Inno says:

          that is not just the junk-bond market, but the entirety of the debt-credit sales channel (banks, intermediaries, etc.). Is it time to short the banks again (yet)?

        • Keep trying to figure what the banks have to do with Fed crypto accounts? Are they on the outside? If crypto is a transactional currency, with no store of value, how does debt figure in?

    • Jonas Grimm says:

      Wah-wah, blah-blah, evuhhhl Soshulists. etc etc.

  5. Yort says:

    Does the Fed even realize that all they have accomplished in the last 10 years was to “Making Billionaires Great Again” and “Build Back Billionaires”?

    Do they realize that they created “mmmm tttttt”, and now the Treasury is taking the powers of infinite money printing from the Fed?

    The Fed is now a govt puppet (grandma Treasury of Debt will shock everyone in a few months), even if they do not realize it yet. And as the govt needs all votes to survive, so it will print to buy votes and “save” anything that has a human pulse connected to it from any sort of economic reality…including junk bonds. Nobody will be allowed to fail, reality will be delayed until further notice, and then we will all have clean up this mess together at some point in time when too many balls are in the air to juggle.

    Enjoy the “Something for Nothing” while it lasts…

  6. gorbachev says:

    I mostly worry about sovereign debt. When countries
    cannot bail out the zombies then it’s a problem.

  7. I am waiting for the Bond Vigilantes of the 1980’s to return to the bond market and start pricing this ocean of default-headed debt as it should be priced without interference in a free and efficient market by the I-know-better-than-you FEDERAL RESERVE. If prices were allowed to adjust to the reality of the 2020 world, junk bonds would be yielding, via the above ICE junk bond index, some 15% to 18% in a heartbeat.

    Inflation is easily approaching 6% to 8% today, so that leaves you about 10% per annum to cover the real threat of DEFAULT in a Pandemic Depressionary World. Pray to enjoy this portion of return for as long as possible, because when the bond eventually trades at 30 cents on the Dollar level, if that, you need to have held it for 3 years to ONLY lose 40% of your principal after inflation. What a deal I have for you.

    • Absur Ditty says:

      “Inflation is easily approaching 6% to 8% today”

      ROFL LOL, believes inflation is only 6-8%

      • Underground says:

        October-November inflation

      • dr spock says:

        I agree with you. Inflation is grossly under reported

      • paul easton says:

        I can tell you that crack is going through the roof. You can’t find anything good anymore. They step on it real hard.

      • A. I used “easily” as a qualifier LOL, and B. ShadowStats by John Williams, certainly more accurate than BLS, shows October, 2020 inflation, year to year, at about 9%. POINT BEING: IT IS MULTIPLES OF THE CPI BULLCRAP OF 2% TARGETTING BANDIED ABOUT BY THE ROGUE, OUT OF CONTROL, FED. Merry Christmas.

        What is magic about a 2% inflation rate that the nefarious, almost ignorant Fed uses as a benchmark??? ABSOLUTELY NOTHING. Number could have come from the bowels of the earth and be as irrelevant as 1.735% inflation.

        • Wolf Richter says:

          ShadowStats is a joke. Actual consumer price inflation is likely higher than CPI, but it isn’t 11%. At 11%, the amount you have to spend to just maintain your standard of living more than doubles every 7 years — FOR EVERYONE!!! That’s just pure BS. People need to use their brain and do the math.

        • Absur Ditty says:

          3 different measures of inflation:

          1) Monetary Inflation (% change in quantity of dollars in existence)
          2) CPI (Consumer Price Inflation – govt defined index based on substitution)
          3) Asset Price Inflation (% change in prices of stocks, bonds, real estate, bitcoin, minerals, etc)

          Which one will guide you make the smartest financial decisions?

          Obviously CPI! Base your investing and your financial planning on CPI because the govt provides this index for us. Plus, there is always a cheaper product you can substitute when prices go up. For example:

          Buy cat food when price of steak goes up- 0% inflation

          All you have to do is get an interest rate higher than CPI and you will be RICH!!!!

  8. Cautious Optimist says:

    Markets no longer exist. You can’t have central banks purchasing stocks and bonds directly or indirectly. They do nothing for their money. They are price insensitive. Price discovery has been eliminated.

    The biggest financial story of my lifetime was that the central banks of Switzerland, Norway, Japan, Israel and others were buying stocks in the US, and this story went largely unreported. I only learned about it years after the fact. After valuations had already been driven to unreasonable levels, and our own central bank had made it virtually impossible to earn safe returns anywhere. You can count me amongst the end the fed crowd.

    • BatHelix says:

      I can’t believe that story doesn’t get talked about more. We seem to have created a situation where we will give away ownership of our companies for free to other countries….and the only consequence is something they actually want…a lower exchange rate! I actually don’t know why they don’t just buy as much as they can until their currency would drop say 50%…. Switzerland could own half the US market or some such thing and the entire country could live off the dividends for the rest of their lives. If there’s a hole what I’ve said please explain because it drives me nuts to think about.

  9. BuySome says:

    Upon reviewing the case file, the detectives discovered the patient had expired as a result of ignoring the carbon monoxide alarm wailing like a Wolf in the woods. The coroner’s report held it to be a case of “Debt by asphyxiation”, with secondary causes attributable to repeated trampling around the thorax brought on by stampede mentalities in an environment of unstable soils and fresh clumps of green manure. The effects were obviously cumulative in their nature, but hardly unpredictable. The end was natural and did not beg for further inquiry. No memorial will be held.

  10. WOLFSTREET reader from Iran says:

    Hmmm… It’s really, really weird?

  11. Higher yields imply higher rates of growth, so why is the Federal Government deliberately suppressing economic growth?

    • Robert says:

      You should see the yields in Venezuela-no growth though(and, BTW, the Caracas stock exchange has outpaced all others the past 5 years). The trillions added to the national debt the past decade certainly qualifies the U.S. as a Banana Republic (but if you have a nuclear triad no one dares say the King has no clothing)

  12. lenert says:

    Why do we need junk bonds again?

    • Joe in LA says:

      It’s part of the modern American social contract. There was an ugly period in American history when junk bond speculators occasionally experienced losses.

      Americans were so collectively horrified by this that they signed up for mass unemployment, skyrocketing rents, and bread lines — really anything to prevent that kind of horrible, unfair abuse from happening again.

      We haven’t gotten to televised human sacrifices to the market yet — but not for lack of willingness.

  13. BuyHighSellLow says:

    It’s finally occurring to me that there is no point in the future where there will come a fork in the road and the country will have to choose which economic future to aim for. We already came to that fork some time ago and the direction the economy is heading in has already been determined: Mommy Congress and Father Fed will keep taking on debt through deficits and printing money to prevent the price of assets from crashing.

    Smoke ’em if you got ’em!

  14. Cas127 says:

    Wolf,

    Excellent and important post, Wolf.

    To me, the junk bond rates are one of the clearest and most understandable measures of just how crazy G interference has allowed things to become,

    (ie, companies ever more indebted and therefore risky…but can now borrow more cheaply than ever. Why? Because the government is explicitly/implicitly flooding the economy with unbacked money to gut all interest rates)

    Simple, clear, to the point, for the mass of people who don’t have the time to study this stuff every day.

    Also, from a political perspective, it clearly establishes the link between the enormous ZIRP subsidy (to DC as well as corporates) and the 20 year destruction of bank deposit interest rates (still the most likely point of financial invt for the mass of people).

    One irony…even with these absurdly low rates, plenty of companies are managing to drive themselves into BK.

    Sure, C19 is administering the coup de grace, but the pre C19 explosion in pseudo BBB bonds illustrates just how many corporates are lining up for BK.

    • Robert says:

      “… Why? Because the government is explicitly/implicitly flooding the economy with unbacked money to gut all interest rates…” You would think the government is bending over backwards to give Joe Sixpack free money. Nothing could be further from the truth. Do you see any movement to ban usury? The banks that own the Fed, to the extent the national debt can be expanded are obtaining trillions virtually interest-free, that is true- but they still get to charge their own card-holders 20-30% APR. These privately owned CB’s- and their subsidiary hedge funds- are using this free money to gather everything from land to food and fibre to industrial+precious metals. The only thing that will put a damper to infinite digital money expansion with CB’s competing for who can gouge the most will be re-institution of some sort of standard.

      • Cas127 says:

        R,

        Fair…to an extent.

        Obviously large institutions have superior access to ZIRP tainted rates (kinda the pt of Wolf’s junk bond graph).

        But I would argue that essentially all of the “borrower” inclination are benefitting from ZIRP gutted rates to some extent…ZIRP tends to lower all borrower (short term) hurdles.

        But all that does is make the problem worse/wider…by creating the illusion of serviceable debt (by gutting rates) ZIRP simply encourages/enables the incurring of *more* unrepayable debt (at maturity/rollover if nothing else).

        *And* ZIRP has to instigate toxic (if hidden) inflation in order to do so.

        • Ed says:

          “superior access”?

          I think that minimizes the situation. While the Fed gives banks and large companies and the wealthy access to near zero interest rates, the Trump Administration blocks a rule that would force pay day lenders to determine whether borrowers might be able to actually pay back their loans.

          And major pay day lenders, who charge 300% interest rates get access to 3% loans from the spring bailouts.

          There’s an effort in Michigan to increase the cap by 4x of how much pay day lenders can loan at 300% or whatever the max rate is. The Catholic Bishops in Michigan have objected, as they should.

        • Ed says:

          Said pay day lender who got access to 3% loans happened to be a big money donor.

          Usury used to be outlawed because people in need who were forced to pay exorbitant rates were effectively made debt slaves.

  15. Robert says:

    Hasn’t the Japanese govenment been buying corporate debt for years with no problems? Maybe Japan’s economy is stagnant, but if you’re the 1%, who needs growth?

    Seems like the path to riches in America is to start a corporation that is all hot air, float a bunch of debt, pay yourself an exorbitant salary on no earnings, then retire early in the Bahamas.

    • Lee says:

      Japan is an interesting case where the ‘normal’ rules don’t seem to apply.

      The country can be divided into a bunch of sectors which really balance each other out.

      The government has huge debts.

      People have huge cash and asset balances.

      Companies other than banks are sitting on a huge pile of cash. IIRC that cash pile is the biggest it has ever been.

      Japan generally runs a positive trade balance which allows it to pay for all the interest on its debts and allow for the excess to be invested.

      A lot of that investment flows out to the international markets which takes the pressure off the domestic markets.

      And one thing that people very rarely understand it that even during the big RE bubble in Japan, the effect on the ordinary person was negligible.

      Oh sure, they might have seen the paper value of their house and RE go up, but other than an increase in various taxes, it didn’t mean squat.

      Mr Tanaka out in a middle to large city didn’t sell his property or mortgage it to go and buy more RE in Japan or even in a foreign country when the price went up.

      The RE market in Japan for houses is generally quite illiquid. Where you’ll find the liquidity is in commercial buildings, hotels, and tracts of land in the big cities.

      What some rich people did though was instead of buying another property in Japan, for example, they would buy a condo in Hawai’i as the costs of doing that were less than selling their property in Japan, paying taxes on the gains, and then paying the fees and costs on the new purchase in Japan.

      At that time the costs and fees on buying a new $1 million dollar condo would have been the purchase price of a condo in Hawai’i.

      RE capital gains taxes would have been huge as well given that the basis for a lot of RE was quite small.

      People who bought RE in the big cities after WWII have made huge paper gains or what should be termed fortunes from those purchases. Post war crazy inflation rates even helped out those that bought using loans at the time (if they could get them).

      • dr spock says:

        When you add up the assets and deficits of Japan’s government, corporations, and its people, you have a positive number. This enables them to buy their own products more so than import things and with this positive savings rate, they run a trade surplus. Japan does not import people like the US and never really gave up feudalism. Their emperor is still considered god like.

        • Lee says:

          Japan still imports people or they did until the virus hit.

          You’ll find them in the local 7-11, at the MickyD’s or Burger King or even serving drinks at the hotel bar or front desk.

          Last trip to Japan and ‘they’ were all over the place in the big cities.

          The number is small enough so that they don’t disrupt the ‘Japanese community’ though.

          Don’t know if they still have the ’round up the illegals’ day like they had when I lived in Japan though.

          We did have the local cop visit us when we rented and moved to a new area though.

    • Lisa_Hooker says:

      The Bahamas are much less desirable now – because hurricanes. I’ve always been partial to Zermatt. Great place for serious climbers. And it’s reasonably close to Italian and French food.

  16. Mad Dog says:

    I unloaded all my junk bonds 4 years ago. Moved all the assets into safer venues. They are a tax hog. You pay high taxes on the gains which go into ordinary income and lose on the capital loses which usually occur with these indebted companies. I never made squat on these type of investments. They are for suckers. I learned my lesson the hard way.

  17. Wisdom Seeker says:

    In a COVID-economy where people are prohibited from spending disposable income in the usual ways, there will be demand overshoots on the things that they’re still allowed to spend on.

    That would include overpricing of financial ______ including high-short-term-yield bonds.

    P.S. I had trouble filling in the ____. One cannot these things “investments” any more, since the prospective total returns are low-to-negative. Even calling them “securities” is now wrong, since principal on high-yield or stocks is not secure, and thanks to “covenant lite” the actual securitization is often negligible. Can’t call even call them “commercial paper” because they aren’t on paper! So what are they?

    • lenert says:

      Are shareholders investors?

      • Wisdom Seeker says:

        Depends on the company.

        “An investment is one which, upon thorough analysis, offers security of principal and a reasonable rate of return.” – Benjamin Graham

        With P/E ratios at levels not seen since 1929 and the dot-com bubble, and soaring numbers “zombie” companies which cannot even service debt out of EBIT, I’d say “no”. Except the prices keep going up…

        • Wisdom Seeker says:

          … and if you think rampant monetary inflation is ahead, shares might be the least-worst option.

        • RightNYer says:

          If you think rampant monetary inflation is coming, gold or silver is the best bet.

  18. GotCollateral says:

    Thats the beauty of all this intervention: inevestors getting bailout out are forced back into the companies they needed a bailout for, at higher prices and smaller cut of cash flows (if said flows even exist).

    TSLA, 1 notch above CCC, has some unsecured callable toilet paper trading at 104, and im not aure tequlia profits will last forever

  19. Taps Coogan says:

    4.61% seems pretty high. A third of Argentina corporate bonds now have negative yields. Now that’s an investment.

  20. Rcohn says:

    FINAL JEOPARDY QUESTION
    Which is riskier
    A . JNK ( junk bond etf) – priced to yield 5.19
    B. TIP( inflation protected Treasury bond etf priced to yield % (-.94) real yield
    C. TSLA- priced at over 1000p/e

    All three share an important characteristic . They are backed by the government
    HYG And TIP via intervention by the FED.
    TSLA by subsidies and credits from the Congress and states and via cheap interest rates

    • Petunia says:

      What is JNK, because it is a derivative and doesn’t actually hold anything of value. It could easily hit zero on the next flash crash.

    • The only quant that can hurt you with TIP is rising yields and no or low inflation. If you hedge with a bear bond fund etf, you are covered. Belt and suspenders.

  21. The Rage says:

    I disagree. The Fed is overrated and pandemic suppressed yields allowed debt to be kicked down until the mid-late 2020’s. The Fed seems surprised as well, constantly looking for a bank run that never comes.

    • RightNYer says:

      I would be floored if this game of extend and pretend can go on for another 5-10 years.

      • The Rage says:

        Well yeah, this lasting to 2030 would be a surprise, but 2025-26???? Sure.

        • RightNYer says:

          I don’t think so. Yields are steadily increasing on t-bills, meaning investors are no longer willing to buy 0.6% ten year bonds. The Fed games are having less and less effect, and there’s been a flight to gold, crypto, and other assets. This to me is a sign that people, both here and abroad, are losing faith in the dollar. That’s ultimately all the Fed cares about, as a strong dollar/belief in the dollar is the only thing keeping their games working.

        • The Rage says:

          These debt booms last longer than you can stay solvent.

        • RightNYer says:

          I can stay solvent very easily, as my gold isn’t going anywhere.

        • The Rage says:

          Gold is a worthless rock when the system collapses. Better learning how to kill with your hands. All property and money will be worthless. It will degenerate into a bunch of tribal leaders hands as unemployment turns into structural collapse.

        • RightNYer says:

          I have plenty of guns and ammo too.

        • Endeavor says:

          I’m doing the Biden Barbell portfolio. 15-20% American Large Cap stocks for Stimulus/Asst inflation heck at one end, 80% cash for Deflation heck in the middle and 15-20% Gold and commodities for unknowable heck at the other end. I feel as a retiree this is my only option.

        • Bobber says:

          Endeavor, I like your thinking. I’m 30% stocks, 10% gold, 60% cash and ST bonds. This protects against deflation and inflation, and allows me to sleep at night.

          Cash has tremendous option value right now. It’s like a long-term put option that decays only 2% per year.

  22. SoCal9 says:

    Possible USA will rob-pillage Saudi Arabia/Middle East. Enough there to prop up this load.

  23. Martha Careful says:

    Dr Yardeni published a post a few years ago about the 2-yr treasury yield being a proxy, for where the 10-yr Treasury will be, a year from now. Hence, a year from now, rates apparently will remain very low.

    At FRED, it’s easy to see how the stress levels impacted yields and how long it took for volatility to find equilibrium. It’s been said this time is different, because of less overhang, i.e., less systemic damage from systems buried in fraudulent, worthless financial instruments. But, if we learned anything from the GFC, it’s easy to see that debt gets kicked down the road, with yields falling lower and lower. Maybe lending money won’t matter going forward and we’ll adapt to an entirely new way of life?

    See FRED:

    (a) ICE BofA US High Yield Index Effective Yield, Percent, Not Seasonally Adjusted (BAMLH0A0HYM2EY)

    /

    (b) 2-Year Treasury Constant Maturity Rate, Percent, Not Seasonally Adjusted (DGS2)

  24. Micheal Engel says:

    1) Junk bond yield hit an all time low.
    2) $CPCE (equities put/ call ratio) hit an all time low. // $NYA200R @88 is higher than 2016 high, Jan 2018 high and Feb 2020 high, but the fake unemployment is still near peak, the highest reading since the 1930’s.
    3) $Gold was breaking out in 2020, showing signs of strength, backing up on the way to a new all time high.
    4) There is 6% – 8% inflation, but the Fed is blind, because the yield curve
    is defective for a long long time. Gravity with NR prevent US10 from rising > 1%.
    5) But what if : $CPCE new all time low is a contrarian indicator.
    6) And what if : $Gold UT will send gold down to $1,000 on the way to $600.
    7) Why US treasury Mnuchin replace the front end with 7Y, 10Y
    notes and 30Y bonds.
    8) And why TY in a 9 months trading range, despite DX correction to 90. // Imports from across the globe, especially from China, is up because DX is down. When excess inventory will be on sale with large discount DX will rise.
    9) Speculator are buying house in the flyover states, demanding
    exuberance rent. Flyover rent will fall, along wit NYC & SF, but RE taxes will not.
    10) What if : $EURUSD is doing an A-B-C down, since Jan 2018(H), on the way to parity, or below 1.00.

    • Endeavor says:

      I’m doing the Biden Barbell portfolio. 15-20% American Large Cap stocks for Stimulus/Asst inflation heck at one end, 60% cash for Deflation heck in the middle and 15-20% Gold and commodities for unknowable heck at the other end. I feel as a retiree this is my only option.

      Corrected

      • Dave says:

        I was chuckling at your portfolio being more than 100%…figured it was sarcasm. You had 6/5ths of a pie. :)

      • Fat Chewer. says:

        And I thought you had come up with the most outrageous investment strategy of all time for the craziest economy of all time. I actually thought it was so crazy it might just work.

  25. Y says:

    Just look at Japan. Junk bond yield will continue going down. CB still has quite a lot firing power, especially the narrative will be business recovery after vaccine distribution. Close to 60% of Americans are willing to take vaccines, which is pretty good.

    • RightNYer says:

      Do you really see no difference between us and Japan?

      • Y says:

        US is more capable if you ask me, less debt ratio and more forced buy as reserve currency.

      • Right now in Bejing they are putting a check mark next to Hong Kong, drawing a line under Taiwan, and making room for a new entry.

        • historicus says:

          Australia, eventually. Kicking them around now a bit.
          The Chinese are patient, and long term planning is right up their alley.

    • Lee says:

      “Close to 60% of Americans are willing to take vaccines, which is pretty good.”

      In other words 60% of Americans are so dumb that they are going to bet the rest of their remaining lifespan on a vaccine which is based on unproven science, lacks testing, and has been rushed through thus evading normal procedures for a product like this that noramlly takes 10 to 15 years to get to market.

      Good luck with that.

      Masks, basic common sense, and people taking care of their health (not smoking being overweight, and drinking to excess) would have no doubt resulted in in far fewer people dying from the virus.

      Add in a proactive responce that would have protected people in aged care and long term care facilties and the result would have been a nothing burger.

      • Y says:

        “In other words 60% of Americans are so dumb that they are going to bet”

        I would say 60% are dumb as there are a lot of friends in finance say they will. It’s all based on risk calculation.

        “Masks, basic common sense, and people taking care of their health (not smoking being overweight, and drinking to excess) would have no doubt resulted in in far fewer people dying from the virus.
        Add in a proactive responce that would have protected people in aged care and long term care facilties and the result would have been a nothing burger.”

        Young people still can die from covid-19 just way fewer. If you don’t like new RNA vaccine, you can try some traditional vaccine from China.
        Hasn’t the train full of your suggestion already left station?

        • MonkeyBusiness says:

          Not sure how someone here in the States can get the Chinese vaccines. Or even the Russian one. They probably won’t make the insurance companies money so even if they are very effective, you won’t see those offered here. Also never underestimate what an average American brain will do when prompted with sentences containing China and Russia. Best scenario is shutdown, worst scenario … meltdown.

          I plan to fly out maybe 2 years from now to get one of the Chinese offerings. And no you don’t have to fly to China to get one. A country in South East Asia will do.

      • Happy1 says:

        Wow. I’ll be taking the Pfizer vaccine in 3 weeks in my health system thank you very much. The vaccine is vastly superior to what you are describing as the best option. It’s the 40% who won’t consider the vaccine who are the problem, although I could understand a young person weighing risk and benefits and deciding the virus most likely won’t harm them.

        Watch carefully what health professionals do, I can tell you that literally all of them that I know are eager to get vaccinated. I don’t know a single physician or nurse who feels otherwise.

  26. Mad Dog says:

    The only reason Junk bonds are doing as well is because there is no yield on any other investments. Pension Funds and Investment houses are under a lot of pressure to generate yield for their investors. If they don;t they will soon be looking for new job. So becasue of the Fed’s zero interest rate policy, millions of people have directly or indirectly had their life savings dumped into Junk Bonds and funds that invest in Zombie corporations and other financially unstable enterprises. They will have to pay the piper later when the whole house of cards come crashing down.

  27. RoundAbout says:

    Today, I wanted to buy a three month bond — Just wanted a slightly higher rate than zero. Fidelity showed red indicating it would have a negative return. Order cancelled after the warning. Same with CDs. Nope not a treasury bond.

    Really frustrating that nobody in this industry can make a stable product with a paltry 2-3% return.

    Back to the casino I go…

  28. max says:

    Walter Bagehot:
    “Nothing can be truer in theory than the economical principle that banking is a trade and only a trade, and nothing can be more surely established by a larger experience than that a Government which interferes with any trade injures that trade. The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.”

    Walter Bagehot:
    If the banks are bad, they will certainly continue bad and will probably become worse if the Government sustains and encourages them. The cardinal maxim is, that any aid to a present bad bank is the surest mode of preventing the establishment of a future good bank.

    Walter Bagehot:
    John Bull can stand many things, but he can’t stand 2 per cent.

  29. Underground says:

    In this brave new world of impled fed underwriting of all paper assets there is no such thing as junk anymore: all commercial paper bear the same rating as the fed. If the fed won’t let go, it will eventually go down with the system. And the longer they wait to let go of rotting flesh the will need to be amputated to save the core.

  30. Sir Eduard R. Dingleberry III says:

    How long until the low interest rate death spiral flushes us all? If only we could climb back up out of this toilet. But the Fed doesn’t care about normal people…

  31. MonkeyBusiness says:

    Various California counties have issued another round of stay at home order. Expect markets to go bananas this Monday.

    Jeff Bezos’ head might explode at this point from all the power and money flowing through Amazon.

    Junk bond yields might go negative this time next year.

  32. Cobalt Programmer says:

    I sometimes wonder about the reality…
    Is it
    1. people who are able-bodied and willing to work but cannot find any work?
    2. Forced to work part time as opposed to laid-off but previously full-time employed?
    3. Couple of people who slept in the car today?
    Honestly, I really do not care about the bond-traders, tesla-short positions and JNK bonds yield…Food is still affordable. Rent might be forgiven or reduced. The real trouble starts only when the renters are evicted, food is not affordable and people are three days away from starvation.

    I am planning to change my name to “Bear Skin Rugs”

    • GotCollateral says:

      Right, rental/mortgage forgiveness and prop up zombie companies forever… glad i left for greener pastures where rental/mortgage forgiveness isn’t a thing, zombie companies get slaughtered in spades of all sizes and people dont expect to suck on the teat of moral hazards and bailout-istan for the rest of their lives with delusions of grandeur lol

      And people think hastily tested vaccines from big pharma slanging and lockdowns are issues… hahahaha

  33. makruger says:

    From the sounds of things, we should be trading away all those junk bonds (or any duration US corporate or government bonds for that matter) and loading up on Mexican Peso’s.

  34. Gerry says:

    Thanks for nothing, central banking.

  35. Bobber says:

    Wolf, I’m amazed you wrote that last paragraph without adding any foul words. The Fed has no business bailing out business and speculative concerns that take on too much debt. After the lessons of the Great Recession, legitimate businesses knew the risks that come with leverage. Companies that leveraged up anyway, including via stocks buybacks, were doing so expecting the Fed would bail them out. Why does a government sponsored organization like the Fed insist on serving the interests of Wall Street speculators that cause damage to our economy?

    In my opinion, the Fed has been “captured” by financial speculators on Wall Street. Heck, they can’t even develop an economic plan without seeking closed-door advice from Goldman Sachs.

    • Wolf Richter says:

      Bobber,

      “Wolf, I’m amazed you wrote that last paragraph without adding any foul words.”

      My AI-based censor wouldn’t let me and blocked all the foul words :-]

  36. historicus says:

    Central Bankers promote
    debt creation
    yield chasing
    desperation investing
    and misallocation of resources.
    since 2008.

  37. Wes says:

    Interesting to say the least Mr. Richter. It seems like Corporate Wall Street is always busy contemplating and creating the next bubble while the Fed is still trying to handle and extinguish the last one that Corporate Wall Street “created”.

  38. Mad Dog says:

    We need another Paul Volker. He was the best Fed chief since McChesney Martin under Ike. Bring back those 18% mortgage rates and 21% prime interest rates.

  39. Ed says:

    The Fed seems to be trapped. They have encouraged unsuccessful companies to continue and most companies to accumulate debt.

    It seems like we are in for a lot of inflation or else liquidation. But it also seems to me that the U.S. Central Bank can push the bad end out and out and out.

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