Talk Irvine

General => Economy & Finance => Topic started by: Liar Loan on May 25, 2018, 10:00:56 AM

Title: The Bond Bubble
Post by: Liar Loan on May 25, 2018, 10:00:56 AM
A bloodbath in junk bonds could lead to another credit crunch and put upward pressure on yields (ie interest rates).  Junk bonds have gotten so expensive that there is almost no risk premium being paid to investors now.  The holders of this credit will face the double whammy of huge losses from companies that can't roll their debt over, and losses from the return of risk premia which will cause the value of junk bonds to plummet.

Junk bonds can be fun to own during good times.  They pay a high yield and go up in value, but if anybody on TI is holding these in their portfolios, you may want to think about jumping ship when the next bear market in stocks commences.  Stocks and junk bonds are highly correlated, and stocks are the "canary in the coalmine" that will announce the next recession before economists officially declare it.

High yield assets are more overvalued than stocks in general, so they will suffer the most losses.  Yield chasers will be punished accordingly. 

Moody's warns of 'particularly large' wave of junk bond defaults ahead
Quote
With corporate debt hitting its highest levels since before the financial crisis, Moody's is warning that substantial trouble is ahead for junk bonds when the next downturn hits.

The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is "benign," that won't be the case when economic conditions worsen.

Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last.

Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody's considers "highly speculative," as opposed to "non-investment grade speculative."

In dollar terms, that translates to $3.7 trillion in total junk debt outstanding, $2 trillion of which is in the B1 or lower category.

"Strong investor demand for higher yields continues to allow all but the weakest issuers to avoid default by refinancing maturing debt," Verde wrote. "A number of very weak issuers are living on borrowed time while benign conditions last."

https://www.cnbc.com/2018/05/25/moodys-warns-of-particularly-large-wave-of-junk-bond-defaults.html
Title: Re: The Bond Bubble
Post by: Liar Loan on May 25, 2018, 03:28:57 PM
Charts show the largest bond ETF is on track for its worst year in history
Quote
Bond prices have plummeted this year, sending yields to multiyear highs. If the pressure on Treasurys continues as expected, the market's largest bond ETF could surpass the drop seen in its worst year on record, says one market watcher.

"Anyone who is holding bonds this year is feeling some pain," Charlie Bilello, director of research at Pension Partners, told CNBC's "Trading Nation" on Thursday.

"If that trend continues, it will be the worst year for the largest bond ETF in the world – AGG. It would also be the worst year in history for the Barclays Aggregate bond index, which is the biggest bond index out there," he said.

The AGG U.S. Aggregate Bond ETF is down more than 3 percent for the year on an absolute basis, second worst to a 4 percent drop in 2013. Should the pace of losses continue as markets expect, it will quickly surpass that drop. Analysts expect a minimum of three Fed rates hikes and an increased supply of government bonds to keep pressure on prices this year.

On a total returns basis, the ETF is down 2.3 percent, its worst year since its inception in 2003.

https://www.cnbc.com/2018/05/25/charts-show-the-largest-bond-etf-is-on-track-for-its-worst-year-ever.html
Title: Re: The Bond Bubble
Post by: Liar Loan on May 31, 2018, 10:21:13 AM
Bond fund managed by Bill Gross has its worst day ever
Quote
The portfolio manager's Janus Henderson Global Unconstrained Bond Fund declined by nearly 3 percent, its worst day since inception, as bond market volatility surged on Italian geopolitical concerns. The fund is now down 5.9 percent for the year to date through Tuesday, according to Morningstar.

In a letter to investors about the first quarter, Gross wrote, "Volatility sales on U.S. interest rates contributed to performance, namely positions structured to benefit from a moderate rise in rates."

Assuming he didn't change that position in the second quarter, that bet would have blown up. On Tuesday, bond prices rallied as yields tumbled when investors grasped for a safe haven from the prospect of another euro zone crisis.

https://www.cnbc.com/2018/05/30/bond-fund-managed-by-bill-gross-has-worst-day-ever.html
Title: Re: The Bond Bubble
Post by: morekaos on May 31, 2018, 10:32:08 AM
Gross is a douche....stay away from bonds.

Title: Re: The Bond Bubble
Post by: Liar Loan on May 31, 2018, 10:38:09 AM
Gross is a douche....stay away from bonds.

You've got to wonder, with as rich and successful as he has been, why not just retire now that the bull run is over?  He's kind of like Kobe in that he can't give up the spotlight, but the last few years of his career have really hurt his legacy.
Title: Re: The Bond Bubble
Post by: morekaos on May 31, 2018, 10:56:02 AM
Wage inflation is spiraling out of control, no one wants to notice it and bond managers are too inexperienced and young to recognize the signs.  Stay out of bonds.

Walmart to offer employees a college education for $1 a day

Walmart, the country’s largest private employer, announced Wednesday that it will pay for its workers to go back to school — as long as they get degrees in business or supply-chain management.

Earlier this year, Walmart raised its starting hourly wage from $9 to $11 and began offering paid parental leave and adoption benefits to full-time employees. Other companies have also taken similar measures in recent months, with Target pledging to raise its minimum wage to $15 an hour by 2020 and Starbucks offering paid sick leave and stock grants to its baristas.

https://www.washingtonpost.com/news/business/wp/2018/05/30/walmart-to-offer-employees-a-college-education-for-1-a-day/?noredirect=on&utm_term=.bf712b754939 (https://www.washingtonpost.com/news/business/wp/2018/05/30/walmart-to-offer-employees-a-college-education-for-1-a-day/?noredirect=on&utm_term=.bf712b754939)

Rising rates could be problematic because the typical money manager working today has never dealt with them before
The U.S. 10-year Treasury note yield rose to its highest level since 2011.
The median tenure of an active equity manager is eight years, according to Fundstrat, citing figures gathered from Morningstar.
"There are a lot of people that haven't been through many things in this youthful industry," notes Timothy Parton, a portfolio manager at J.P. Morgan.

https://www.cnbc.com/2018/05/15/us-rates-surge-and-most-portfolio-managers-dont-know-what-to-do.html (https://www.cnbc.com/2018/05/15/us-rates-surge-and-most-portfolio-managers-dont-know-what-to-do.html)
Title: Re: The Bond Bubble
Post by: morekaos on May 31, 2018, 11:00:19 AM
Gross is a douche....stay away from bonds.

You've got to wonder, with as rich and successful as he has been, why not just retire now that the bull run is over?  He's kind of like Kobe in that he can't give up the spotlight, but the last few years of his career have really hurt his legacy.

No one has the class of Walter Payton (Sweetness) any more...Go out at the top and never look back

Title: Re: The Bond Bubble
Post by: morekaos on June 01, 2018, 10:26:20 AM
1) Payroll growth hit 223,000 for May, its highest level since February, beating market expectations for 188,000.

2) The headline unemployment rate fell to 3.8 percent, the lowest reading since April 2000, while the "real" rate, which includes discouraged workers and the underemployed, dropped to 7.6 percent, its best since May 2001.

3) Average hourly earnings rose 2.7 percent, in line with expectations and enough to convince markets that the Fed will raise interest rates at least two more times in 2018.

4) Full-time jobs rose an eye-popping 904,000 for the month, while part-time positions declined by 625,000.

5) Unemployment for blacks continues to decline, with the rate falling to a fresh record of 5.9 percent, down a full point from March.

It's numbers like these that in previous rate cycle shifts would sent the bond market reeling downwards violently.  Since this kind of economic growth has not been seen since the mid 90's I think the young bucks running the bond market are hesitant to react to a situation they have never encountered...hence the non-reaction in the rate market right now.  A correction of that inefficiency is in the making, and I don't think it will be pleasant.

https://www.cnbc.com/2018/06/01/the-5-most-important-numbers-from-fridays-jobs-report.html (https://www.cnbc.com/2018/06/01/the-5-most-important-numbers-from-fridays-jobs-report.html)
Title: Re: The Bond Bubble
Post by: Liar Loan on June 01, 2018, 10:38:52 AM
It's numbers like these that in previous rate cycle shifts would sent the bond market reeling downwards violently.  Since this kind of economic growth has not been seen since the mid 90's I think the young bucks running the bond market are hesitant to react to a situation they have never encountered...hence the non-reaction in the rate market right now.  A correction of that inefficiency is in the making, and I don't think it will be pleasant.

It would probably help if the world economy was as strong as the US economy.  If only we could clone Trump and install him as supreme leader of all nations.
Title: Re: The Bond Bubble
Post by: Liar Loan on September 05, 2018, 10:06:01 AM
It's Beginning to Look a Lot Like a Crisis
The emerging-market selloff has all the hallmarks of contagion.
Quote
Emerging-market currencies and stocks tumbled again today, part of a long selloff that increasingly has a crisis-y feel. Satyajit Das lays out all the hallmarks of a standard EM crisis: “a large dose of debt and an associated domestic credit bubble, including misallocation of capital into uneconomic trophy projects or financial speculation. Then add: a weak banking sector, budget deficits, current-account gaps, substantial short-term foreign-currency debt and inadequate forex reserves. Season with narrowly based industrial structures, reliance on commodity exports, institutional weaknesses, corruption and poor political and economic leadership.”

Remind you of any country in particular? It could apply to Turkey, certainly, where inflation has spiked and a central bank of questionable independence is waiting too long to do anything about it, writes Marcus Ashworth.

It could also describe Argentina under past leadership, which has left such a mess for its current president that the IMF must soon bulk up its relief package or watch the crisis grow, warns Mohamed El-Erian. That said, Argentine President Mauricio Macri has harmed market confidence more than he has helped, writes Mac Margolis.

https://www.bloomberg.com/view/articles/2018-09-04/emerging-market-selloff-looks-like-a-growing-crisis
Title: Re: The Bond Bubble
Post by: morekaos on October 04, 2018, 10:59:47 AM
This is how it used to be during our last rising rate cycle in the mid to late 90's.  However, I suggest that the markets continued to rise that time (in fact tripled from 95-99) while rates rose.  I think that will happen again.

Good economic news is now bad news for stocks as rising interest rates take hold
Strength in the U.S. economy is morphing into a yield story.
Strong data on the U.S. economy has been building for a while, the Fed is signaling rising rates and trade war fears have eased, all pushing rates higher. Rate-sensitive sectors in the stock market are down.
When risk-free assets like Treasuries have a big move like we have seen, traders sit up and take notice.

https://www.cnbc.com/2018/10/04/good-economic-news-is-now-bad-news-for-stocks-as-rates-rise.html (https://www.cnbc.com/2018/10/04/good-economic-news-is-now-bad-news-for-stocks-as-rates-rise.html)
Title: Re: The Bond Bubble
Post by: morekaos on October 08, 2018, 12:00:21 PM
You can't raise everyone's wages to $15/hour (like Amazon just did) and not see wage inflation.

US inflation is the world's most important economic variable

Last week’s 15 basis point increase in the yield of the benchmark Treasury 10-year note signals unhinged inflation expectations the Federal Reserve must address with credible policy moves.
The unfolding process of rising credit costs will inevitably lead to America’s growth recession.
The dollar and the U.S. financial system will transmit the growth-stifling impact of the Fed’s liquidity withdrawals to the rest of the world economy.

https://www.cnbc.com/2018/10/08/-us-inflation-is-the-worlds-most-important-economic-variable.html (https://www.cnbc.com/2018/10/08/-us-inflation-is-the-worlds-most-important-economic-variable.html)
Title: Re: The Bond Bubble
Post by: Soylent Green Is People on October 08, 2018, 12:29:35 PM
Another article to enjoy on the subject:

https://macromon.wordpress.com/2018/10/03/alea-iacta-est/ (https://macromon.wordpress.com/2018/10/03/alea-iacta-est/)

Although my favorite part was this truth bomb:

Even the housing market suffers a dearth of supply.

Private equity, now the largest single holder of single-family residential real estate, has taken a massive supply of homes off the market and converted them to rentals, partly due to the lower cost of capital caused by the manipulation of the Treasury yield curve.  Will these investors start to sell down their inventory as rates move higher, or just continue to raise rents, which could create a real political problem?

…one-fourth of the country’s single-family rental homes are now owned by institutional investors, with more than 200,000 families paying their rent to just nine giant Wall Street-backed firms. According to a report by the Harvard Joint Center for Housing Studies, the majority share of all U.S. rental units (52.2 percent) are owned by institutional investors, and the investor-owned share of single-family homes increased by nearly 40% from 2001 to 2015.5 – ACCE


As it's been said before - "May you live in interesting times." - and these certainly are some of the most interesting days I've seen.

My .02c
Title: Re: The Bond Bubble
Post by: morekaos on October 10, 2018, 11:58:38 AM
1) Payroll growth hit 223,000 for May, its highest level since February, beating market expectations for 188,000.

2) The headline unemployment rate fell to 3.8 percent, the lowest reading since April 2000, while the "real" rate, which includes discouraged workers and the underemployed, dropped to 7.6 percent, its best since May 2001.

3) Average hourly earnings rose 2.7 percent, in line with expectations and enough to convince markets that the Fed will raise interest rates at least two more times in 2018.

4) Full-time jobs rose an eye-popping 904,000 for the month, while part-time positions declined by 625,000.

5) Unemployment for blacks continues to decline, with the rate falling to a fresh record of 5.9 percent, down a full point from March.

It's numbers like these that in previous rate cycle shifts would sent the bond market reeling downwards violently.  Since this kind of economic growth has not been seen since the mid 90's I think the young bucks running the bond market are hesitant to react to a situation they have never encountered...hence the non-reaction in the rate market right now.  A correction of that inefficiency is in the making, and I don't think it will be pleasant.

https://www.cnbc.com/2018/06/01/the-5-most-important-numbers-from-fridays-jobs-report.html (https://www.cnbc.com/2018/06/01/the-5-most-important-numbers-from-fridays-jobs-report.html)

There seems to be only one door...


https://youtu.be/-U1N0VOwXTc (https://youtu.be/-U1N0VOwXTc)
Title: Re: The Bond Bubble
Post by: Liar Loan on November 15, 2018, 12:08:27 PM
Paul Tudor Jones: We are in a global debt bubble
Quote
Billionaire investor Paul Tudor Jones said Thursday that the world has loaded on too much debt which could bring trouble across asset classes.

"From a 50,000-feet viewpoint, we're probably in a global debt bubble," Jones said at the Greenwich Economic Forum in Connecticut. "Global debt to GDP is at an all-time high."

The hedge fund manager believes it is in the corporate bond market where the first signs of trouble will emerge. Data from S&P Global released earlier this year showed U.S. corporate debt hitting an all-time high, totaling $6.3 trillion. Global debt also hit a record high earlier in 2018, reaching $247 trillion.

"I think this time it's going to be corporate credit and I think the breakdowns are something that we have to pay attention to in the last day or two," he said. "And they're really scary because, one thing about this credit bubble [is] we've had liquidity absolutely dry up in so many markets."

"There probably will be some really scary moments with corporate credit," he added.

https://www.cnbc.com/2018/11/15/paul-tudor-jones-says-were-in-a-global-debt-bubble-and-maybe-tax-cut-wasnt-a-good-idea.html
Title: Re: The Bond Bubble
Post by: daedalus on November 16, 2018, 02:10:24 AM
Global debt bubble?  You don't say.

I went to my credit union 2 weeks ago to get a loan to buy a vehicle.  I told them I wanted to borrow "about $30k".  They approved me for a $50k used car loan on the spot and they NEVER ran my credit. I am 100% serious.  Other than the mortgage, I haven't had a loan since 2008, so it's not like I have any meaningful payment history with them.

When money is that easy to borrow there are bound to be problems.
Title: Re: The Bond Bubble
Post by: irvinehomeowner on November 16, 2018, 07:19:52 AM
Global debt bubble?  You don't say.

I went to my credit union 2 weeks ago to get a loan to buy a vehicle.  I told them I wanted to borrow "about $30k".  They approved me for a $50k used car loan on the spot and they NEVER ran my credit. I am 100% serious.  Other than the mortgage, I haven't had a loan since 2008, so it's not like I have any meaningful payment history with them.

When money is that easy to borrow there are bound to be problems.

Can I ask what rate they quoted you? :)
Title: Re: The Bond Bubble
Post by: Kings on November 16, 2018, 08:10:00 AM
Global debt bubble?  You don't say.

I went to my credit union 2 weeks ago to get a loan to buy a vehicle.  I told them I wanted to borrow "about $30k".  They approved me for a $50k used car loan on the spot and they NEVER ran my credit. I am 100% serious.  Other than the mortgage, I haven't had a loan since 2008, so it's not like I have any meaningful payment history with them.

When money is that easy to borrow there are bound to be problems.

Can I ask what rate they quoted you? :)

and which credit union is handing out loans like candy? daddy needs a new ride...
Title: Re: The Bond Bubble
Post by: nosuchreality on November 16, 2018, 08:28:01 AM
Global debt bubble?  You don't say.

I went to my credit union 2 weeks ago to get a loan to buy a vehicle.  I told them I wanted to borrow "about $30k".  They approved me for a $50k used car loan on the spot and they NEVER ran my credit. I am 100% serious.  Other than the mortgage, I haven't had a loan since 2008, so it's not like I have any meaningful payment history with them.

When money is that easy to borrow there are bound to be problems.

Since its your CU, hows your asset base under their stewardship compare to the loan?
Title: Re: The Bond Bubble
Post by: eyephone on November 16, 2018, 08:35:18 AM
Did they run his credit in advance? It’s like receiving blank checks from credit cards. (just taking a guess)
Title: Re: The Bond Bubble
Post by: Liar Loan on November 16, 2018, 09:47:17 AM
Schools First is my credit union and they have my wife and I both perma-approved for $50k car loans with no credit checks needed.  I think they do a soft pull, but not a hard pull and tailor the rate based on that.  I haven't checked after the most recent rate increases, but I'm sure the car loans are still in the low 2%'s.
Title: Re: The Bond Bubble
Post by: irvinehomeowner on November 16, 2018, 10:30:12 AM
Did they run his credit in advance? It’s like receiving blank checks from credit cards. (just taking a guess)

Well, CCs will charge you like 25%+ interest and a usage fee for using those checks, so they mitigate that risk by loan sharking your face.

I'm with NSR, is there a balance with the CU that justifies this no credit check loan?

Although I found that getting a loan though a CU is pretty easy, I could easily get a $50k loan from them without having a balance... but they do pull credit for new members. Maybe as an existing member it's a soft pull like LL said.
Title: Re: The Bond Bubble
Post by: morekaos on November 16, 2018, 10:30:28 AM
School first is so funny. I did the same thing in 2006 when I bought a suburban. They asked me over the phone how much I wanted, told them $35000, and I was astonished that the cash showed up in my account the next day. I called them and the guy told me they’d send me a payment booklet in a week or so. I could have run off to Vegas with the dough and they would take weeks to figure it out. I love that place.
Title: Re: The Bond Bubble
Post by: irvinehomeowner on November 16, 2018, 10:32:37 AM
2006 was a different time.

You can get $1m to buy a home without many hoops to jump through. I was self-employed during that time and it wasn't that hard.
Title: Re: The Bond Bubble
Post by: daedalus on November 16, 2018, 11:03:42 AM
The "quoted" rate was 3.99%, but due to LTV and direct payment withdrawal I walked out with 3.49% for a used vehicle loan. 
Not sure if they did a soft pull, but the lending agent and I had a pretty clear conversation about "running my credit".  I told her to wait to pull my credit until the purchase was certain and, after punching a few things into her magic station, she informed me they would not have to run my credit at all.  There may have been a soft pull involved, but I would have thought she would mention it at the time.

I have been a member there for 20 years.  Long, long ago they may have seen 6 figures in my accounts, but for probably at least 10 years now I rarely had more than $15k in my accounts at any time.  The interest difference I get from other banks is too great to ignore.  I've never had a mortgage with them, just 2 proir car loans, the last of which closed 10 years ago.
Title: Re: The Bond Bubble
Post by: irvinehomeowner on November 16, 2018, 11:09:51 AM
Thanks daedalus. Looks like you got the "loyalty" perk.
Title: Re: The Bond Bubble
Post by: fortune11 on November 17, 2018, 05:49:03 AM
This is a lending bubble if at all not a “bond bubble “ — two totally separate things

And this is the direct result of loose regulation post 2016 — witness the “bubble “ in direct  online lending to consumers

Autos, personal loans = loose ,  kinda like 06
Housing = still nowhere near 2006

And small regional banks are a LOT more aggressive than the big national mega banks

But let’s grant that there is a “lending bubble” - what happens when it bursts ? do bond prices go up or down ? 
And then think of what generally happens to prices of anything when a so called bubble in that “thing” bursts ... there is your answer !
Title: Re: The Bond Bubble
Post by: Liar Loan on November 20, 2018, 09:32:54 AM
I just checked our Schools First perma-approvals and I was wrong it's actually in the high 2's at 2.84%.
Title: Re: The Bond Bubble
Post by: Cares on December 03, 2018, 02:22:26 PM
And our yield curve is inverted!
Title: Re: The Bond Bubble
Post by: Liar Loan on December 03, 2018, 03:27:42 PM
And our yield curve is inverted!

Well, one part of the yield curve is inverted: 3Yr over 5Yr.  I think traditionally Wallstreet watches the 2Yr over 10Yr as a sign of recession.  Personally, I like the 3-month T-Bill over the 30Yr.  That's when you know all hell is about to break loose.
Title: Re: The Bond Bubble
Post by: daedalus on October 31, 2019, 09:03:42 PM
I had a similar experience as before buying a(nother) car from CarMax today.

Told my CU what I wanted to do, and the agent emails me back with a preapproval for $50k, again without running my credit.  Rate quoted @ 3.65% for a used car, though I'm not sure that included the direct payment withdrawal discount.

So I'm out at a CarMax in BFE, and unlike my prior experience, they refused to hold the car for me, even though I was willing to sign a purchase contract.  I've been looking for months to find this car, and I didn't want it to get away, plus it's a long drive back from BFE, so I finance the whole thing at CarMax.  After running my credit (bummer!) they gave me a 2.95% rate.  I intend to just pay it off in 2 days with a check from my CU, so I fax my CU the purchase agreement, and my CU comes back with 2.99%, which is their absolute floor per the agent, and still without running my credit.  Close enough.  I drove home in my forever vehicle, and I'll pick up a check from my CU tomorrow and pay off the CarMax loan on Saturday.
Title: Re: The Bond Bubble
Post by: Liar Loan on March 23, 2022, 10:09:17 AM
Now back to our regularly scheduled bond implosion.

This Is Now The Worst Drawdown on Record for Global Fixed Income

The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $2.6 trillion, worse than about $2 trillion in 2008.

https://www.bloomberg.com/news/articles/2022-03-23/global-bond-losses-deepen-to-11-from-2021-high-most-on-record
Title: Re: The Bond Bubble
Post by: Liar Loan on May 04, 2022, 12:59:19 PM
For 45 years, from 1952-1997, the ratio of household net worth to GDP was in a tight range between 320-400%.  Starting with the dotcom bubble, and continuing with the subprime bubble, and now the current collection of bubbles, this ratio has continued making new highs.  Notice the enormous jump in household net worth that occurred in 2020. 

We were already in a pretty solid "everything bubble" from 2014-19 thanks to QE infinity, but the unprecedented money printing that began in 2020 sent household net worth into the stratosphere.

For household net worth to get back in line with historical averages, all investable assets (stocks, real estate, bitcoin, etc) would need to fall 35% simultaneously.


(https://blogger.googleusercontent.com/img/a/AVvXsEjcdUvscb5OEaCTfjesFD8ttudoEXWaeXLcWFDzbaK9SE7Ll6bCQ3CjS4gZ8m5aVZ2oMcaFsPtpqxqKp0XwyDdxQoc13io_gxNeHKK4COElgbsiLZ2vtcN0jNKpUOu2YKzBhre3uBp3dN8lF__TKyaOjUKyf0KuhnwxwPrJFvmCZAbGJRUfCg=s1097)
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