2017 was a Banner Year for Debt. Spreads continue to collapse and the ease at which leveraged debt is refinanced at lower yields is nothing short of amazing.
Net Issuance of Investment Grade Bonds
Speculative Default Rate
Defaults picked up in 2016 with the collapse in the price of oil. A recession, higher rates, less liquidity, or even a change in investor attitudes, can sink speculative issues in 2018.
Repriced Leverage Loans
Net Asset Purchases
A number of problems are going to move to the forefront in 2018. Reduced central bank liquidity is one of them.
Meanwhile the Fed is on the lookout for “inflation”.
It’s right in front of their noses on asset prices including homes, leveraged loan rollovers at ridiculous prices, and equities in general.
Mike “Mish” Shedlock
There seems little information, but I suspect that Fed’s loans to the investment banks have filled their coffers with cheap money for the carry trade. If that were to stop, the US Treasury might have significant extra debt carrying costs and the Fed would no longer effectively control interest rates. Personally, I think bureaucratic intervention in capital markets is criminal stupidity..
The bond market is telling you they don’t buy into rising rates or inflation. The combo of falling prices and disappearing liquidity and the possibility that the Fed might have to sharply alter course, and finally that the CBs in aggregate may not be able to coordinate this delicate maneuver (pulling the rug out from under an economy that is already falling) should give us pause.
“Easy – by their rules, not mine, they do not count asset bubbles as inflation”.
Mish, surely you are not that naive. “Rules” are meant to be broken, especially by those that think the rules do not apply to them. The Fed has already mentioned the lofty stock market. What happens when stocks and the dollar keep rising due to capital flows from distressed parts of the world? I have been pointing out this scenario to you for over a year and you still fail to accept this real possibility. THE FED WILL RAISE BECAUSE THEY DON’T WANT TO BE PERCEIVED AS THE SERIAL BUBBLE BLOWER THAT THEY ARE.
In my view the whole “Fed can’t see inflation” meme is a well orchestrated narrative perpetuated by the Central Banks themselves to protect the earning for the large primary banks. It’s my view that the Fed’s balance sheet will never shrink (much), just token paydowns. Which means the large banks will continue to earn interest on their excess reserves (IOER), which were electronically created by the Fed. Current interest payments to the large banks total over $27 billion annually.
If inflation moves higher, the Fed will move interest rates higher (and keep their balance sheet stable), with the excuse that they can’t shrink the balance sheet while treasury issuance is high due to the huge budget deficit.
If a recession hits, the Fed may drop rates a bit, but additional QE will stabilize the IOER payments to the large banks.
Either way, the banks continue to receive their taxpayer funded Welfare payments.
Something will have to give by early 2019. The US deficit is expected to balloon to $1.25t while the FED is expected to dump $600b from it’s balance sheet. Those two events are incongruent with each other. My hunch is the FED will give in, but since everyone in government, outside of defense, wants Trump to fail, it wouldn’t shock me if the FED allows interest rates to shoot up.
“Mish, you point out the inflation in assets, which is an investment, yet you don’t understand why the Fed Wil raise rates???” Easy – by their rules, not mine, they do not count asset bubbles as inflation.
Yes AWC…the Fed, all the central banks, and the Norwegian pension fund can keep this going. especially BOJ..buying all the ETF’s etc…they can’t afford to take away the kool-aid
Mish, you point out the inflation in assets, which is investment, yet you don’t understand why the Fed Wil raise rates???
What implodes first, the US or other parts in the world? Where will global investment flow? What will happen to dollar-based assets, especially stocks? What will the Fed do? Rinse and repeat until the rising dollar and rates creates the crisis needed to replace the dollar and the world’s reserve. The DOW will also be at 40K by then as the transition from public to private gets into full swing with the popping of the govt debt bubble, otherwise known as socialism.
El_Tedo, if you make it to 2020, you’ll have a front row seat.
We all know this ends badly, but will any of us still be alive when it happens?