Here’s what Draghi has accomplished recently: the prices of euro-denominated corporate debt have soared. The average yield of investment-grade debt is on the verge of dropping below 1%. A good part of the €916-billion market for corporate euro debt is already below 1%, according to Bloomberg. Highly rated corporate debt with shorter maturities is trading at negative yields, where brainwashed investors engage in the absurdity of paying for the privilege of lending money to corporations.
Companies, including US companies, are scrambling to take advantage of this free money: They issued over €50 billion of euro-debt in May, the second-busiest month on record. On Monday, at least six investment-grade and junk-rated deals were announced. One of them was Air Liquide SA, which sold €3 billion in investment-grade debt. Four of the five parts of the deal priced with a yield below 1%!
They’re all getting ready for Wednesday.
June 8 is the propitious day everyone has been waiting for: the ECB – which is already buying government debt, covered bonds, and asset backed securities – begins buying euro-denominated corporate bonds. Maturities will range from six months to 30 years. It will buy these bonds either in the secondary market, where previously issued bonds are traded, or in the primary market, thus handing its freshly printed euros directly to the companies (“helicopter money” for corporations).
“The prospect of average yields below 1% is very scary,” Juan Esteban Valencia, a credit strategist at Societe Generale in Paris told Bloomberg. “Investors are being pushed outside their comfort zone to sectors like high-yield debt, where they may not have expertise.”
And where they won’t be paid for the risks they’re taking.
So junk bond yields have plunged as conservative investors are getting pushed into risky paper with a good chance of default, though the ECB won’t be buying junk bonds under the current program. According to the BofA Merrill Lynch Euro High Yield Index, the average junk-bond yield fell from over 6% earlier this year to 4.16% as of June 6.
But investors that jumped on the bandwagon belatedly might be in for a rough ride. That’s how it always happened before.
It’s how Draghi does business. A decision is made in secret to buy a certain type of asset or to lower interest rates. That decision is then communicated in secret meetings to hedge funds and certain other market participants so that they can buy into those positions and start pushing up prices. The ECB has gotten into hot water over this when it came out, but hey, that’s how the ECB operates.
Eventually, the decision is leaked in some form, still couched in vague words, and other players are buying into it, pushing up prices even further. Then the decision is officially voted on at the ECB meeting and announced in a press conference. At this point, the remaining players are buying into it and drive up prices even further. Prices peak around the time the decision is actually implemented, and then they drop, sometimes precipitously.
In the case of the ECB’s buying corporate bonds, that date is June 8.
After that date (perhaps just a few days later), the smart money that got the info during secret meetings will dump these assets to take profits. And the late entrants into the game, those that didn’t have enough insider info, get bloodied.
This happened when the ECB prepared for QE. European stocks skyrocketed to all-time highs during the period that began with the secret meetings. But in April 2015, shortly after QE took effect and the ECB started buying government bonds, stocks sagged. The German DAX, for example, remains 17% off that high to this day.
Same thing with covered bonds. In early 2014, prices started rising and yield spreads (in relationship to government bonds) began tightening as in-the-know investors began buying them, before anything was known to the rest of the world. Then well-placed rumors of an ECB buying program spread, and prices rose further. When the decision was announced in the fall of 2014, prices rose further. When the ECB actually started buying government bonds, prices peaked and yield spreads hit record lows of just above 20 basis points. Then those who’d benefited from the info provided during the secret meetings started dumping these covered bonds to take profits, and the entire trade unwound. Prices fell and the yield spread nearly tripled, before edging down recently, but remains at nearly 50 basis points.
Same thing with asset-backed securities. Those select few in-the-know investors got to position their trades early, watch them get inflated by the in-the-know buying pressure and the ECB’s machinery, and then, when the ECB actually started buying them, they dumped them. Those late to the party, got hit by the subsequent selloff.
It happens every time. That’s how the ECB operates.
This scenario is likely to play out starting sometime after Wednesday. Euro-denominated corporate bonds are likely near their peak, and companies are desperately trying to issue as much as they can at these peak prices. But over the next few weeks, the folks who got in early will dump them, and those investors now jumping on the bandwagon – often unwitting retail investors with global bond funds in their portfolios – get to eat the losses.
Draghi and his ilk excel in shuffling guaranteed profits to their cronies in this manner, all under the mantel of wanting to stimulate inflation. And if pension funds, life insurers, and other retirement arrangements that so depend on yield, impoverish retirees down the road, well, so be it. And if that impoverishment mauls demand because retirees – and there are lot of them in Europe – don’t have enough money to spend, well, so be it too. By then Draghi and his ilk will have moved on.
Contagion from the negative interest rate policies by the ECB and the Bank of Japan are spreading around the globe. Read… The NIRP Refugees Are Coming to America
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Many things are indicating that more money will be headed towards US dollar investments. DXY to 120? It could happen.
I agree and it will blow up the 9 trillion in emerging markets. Its only a matter of time before investors abandon Europe in their droves, the place is a basket case. The Banking industry is being held together with scotch mist, When investors realise their is no possible way many European Nations can not possibly make good on their bonds panic will set in and the flight to safety will begin.
There are so many investors about today looking to ride on the back of other people’s hard work, perhaps the Central Banker’s have a cunning plan.
If all the investors are forced back into the real economy, doing real work, the economy will be booming in no time.
Investors? Or speculators? Honestly there should be an event that wipes these fools out. At this point, they are simply picking pennies in front of a bulldozer.
Perhaps, perhaps not. If we have such an event, there will be enormous pressure for the government to “rescue” the speculators.
The mechanism is appallingly simple. You, Mr. Speculator, hire a Washington lobbying firm. Many of the staff at these firms are former congressmen themselves. They are dispatched to The Hill to show their former friends still in office the path of reason. They call in IOUs from previous times. And, voile la, reason prevails and the public are told to bend over.
This kind of sleaze persists because the public would rather watch the Game of Thrones or the loopy Kardashians than confront reality.
In a democracy, the voters get the government they deserve.
Correct me if I’m ignorant with this inquiry.
Is there no such thing as contagion anymore?
I am sorry, but I just do not see things the way most do.
The reason is clear to me, because I see what almost all here and at ZH see, that contrarian thoughtful people see and what they have been warning about for years now see,
Every single CB is run and controlled by a criminal cartel or mafia and the very simple answer for everyone, ………is withdraw and keep your investments in cash outside of a bank.
You get zero reward for putting it at risk, you have been warned over and over. and sure you get no return on the cash or gold under your bed, but at least it is still yours.
Well the utter futile insanity of the S&P which at my best calculations is now at an almost daily deviation from the norm, of about 4.. So to put that in context, a standard deviation of 4 is an event that occurs about once every 43 years, and not it happens every week at least once.
Of course only manipulation or mass insanity or delusions could cause that, so take advantage, now you see the reality, you see also where reality is going to lead so get there first.
Every day the S&P get a new high I am delighted, I cannot believe my luck that this opportunity that this madness gives me. Ever more ammunition to make an absolute killing at ever lower risk.
Virtually zero downside now but thousands of percent upside.
I have been building a position for the eventual change in the STDev back to normal that even a year ago I would have said would have been impossible that I could have such a massive position at a place where serious loss to me could only occur if the insanity of the markets extended to 5, 6 and more STDev from the norm, or an event that could only occur once every 4776 years at 5 STDev or about 1.4 million years at 6 STDev.
Yet my upside is a potential of over 4,000% gain and with global recession building, over supply building, corporate profits tanking political upheaval everywhere and the muppets piling everything they own into REDUCING my risk of loss even further from its current almost non existent position, its now time to think about selling granny and the kids.
I don’t complain about the filthy criminals yellen and draggy I cheer them on.
By the way does anyone know of a leveraged inverse ETF on EU corporate bonds
How nice for you—-4,000% return. Me, I’m an artist with three jobs in a small well known creative city. I was wrecked twice by TPTB. My friends are also mostly wrecked. We’re really hoping the speculators end up naked in the freezing water……they make nothing, do nothing but move digital shit. It astounds me that the $ people don’t realize how many of us producers are catching on to the fact that the entire system is completely crooked. Many of us will no longer work full time jobs with automatic withholdings. Got what that means? At some point, the paper is worthless, so is the digital.
As an old retired corporate CFO, I’m simply out of words for describing the foolishness called QE (print money, buy government bonds, add to central bank balance sheet, rinse & repeat).
I can’t even begin to get my head around the colossal risk of doing this with non-governmental (eg: corporate) assets.
is an older culture than ours, just don’t worry about it.
“Every single CB is run and controlled by a criminal cartel …”
Five years ago I would have thought this statement was delusional. Now I think it pretty nearly represents the truth except it may understate the problem.
It is patently clear that the function of CBs everywhere is to protect the banks from being punished for their greed and malfeasance.
I’m just an ordinary guy. It is not a good thing when ordinary people start mistrusting the bedrock institutions of our economy. It can’t end well.
As for not ending well…another prep is to have written down the actual physical addresses and account numbers (On Paper) of ones major bills(or to have saved their envelopes: for those still paying by check) That is, Rent or mortgage, gas/electric, hospital /credit card bills. I mention this because of being in California during the Northridge Earthquake. They will still ding your credit score even if the (“automatic”)systems are down.
Thank you Wolf for so accurately reporting the corruption of Draghi and the ECB. Here in the US, we have only a slightly less corrupt Fed and political system, but there there is corruption that is rewarded.
Our Attorney General, Loretta Lynch, is standing by as Hillary Clinton gets a free pass for what she did as Secretary of State. But remember, she was appointed by President Clinton to be the United States Attorney for the Eastern District of New York (Wall Street) in 1999, and she sat on the Federal Reserve’s Bank of New York’s Board of Directors from 2003 to 2005 under then President of the Bank Tim Geithner.
“Every single CB is run and controlled by a criminal cartel …” True, but even more power is wielded when the person in control of the Department of Justice came from that criminal cartel.
Fantastic article, Wolf!