BBB rated are two steps away from junk status. The next stop is BBB-, then Junk.
BBB rated bonds yield just 74 basis points more than AAA rated bonds
BB- rated bonds, the third step into junk, yield 3.93% a measly 69 basis points more.
Bond Ratings
Bad Credit? Who Cares?
The Financial Times reports Yield-Crazed Investors Pile Into US Subprime Car Loans
Deals have been “going gangbusters” in subprime auto asset-backed securities (ABS), said Jennifer Thomas, an analyst at Loomis Sayles, a Boston-based firm managing $286bn of assets. At $29bn so far this year, issuance of subprime auto ABS is on track to surpass 2018’s record haul of $32bn, according to data from Finsight, despite softer sales of new cars and trucks this year.
These subprime card offerings are five or six times over subscribed.
Fed Watching Over You
Everyone seems to be assuming the Fed will not let another bond disaster as we saw in the Great Recession ever happen again.
Feelin’ Lucky?
Mike “Mish” Shedlock
Another issue with these bonds is also the sheer volume of covenant light bonds. I believe the issuance of this type of bond has exploded also.
I wonder how many pension funds are buying these? I expect that they are doing so out of desperation. The basic yields are less than the anticipated yields that they need to meet their obligations. The only way that I can see which will enable them to make up the shortfall is to borrow. I dont know if all pension funds borrow, but it wouldnt surprise me if a lot do.
If they get lucky and it doesnt blow up, then the ones that borrow will be grateful that they did. If it does blow up, and that leverage works in reverse, some pension schemes could collapse completely.
Meanwhile, the spread between bond yields and CPI has been dropping since 1980.
https://pensionpartners.com/inflation-deflation-and-bond-market-returns/
The problem with that article is it fails to mention the govt has doctored the inflation statistics purposely. If inflation was measure using the same parameters they used in the past reported inflation would be much higher. The parameters were last changed around 1996. If the free market was allowed to set rates and not the fed they would likely be much higher. Another great eg of govt price fixing. Its all good the economic wizards in the politburo have everything under control.
Just as bad in the UK with PCP personal contract plans. Next down turn I can see the market awash with cars that people cannot afford to keep up the repayments on. Largest car dealer has a share price of 11p for a reason.
And with negative rates being deflationary…very ugly setup
Mish – for a lot of reasons (actually there’s too many reasons to provide even one), but it is different this time.
It’s also important to note that we’ll all see the exact same disastrous results, but the important factor is that it is different this time….as it is every other time as well…
And, yes, during this holiday season, I do feel lucky, particularly that I moved out of Illinois some years ago…
It is different THIS time.
Picking up pennies in front of steamrollers.
The other possibility is that the BB level junk does not have all that high of a default risk. Is the default risk by rating available somewhere open to the public?
…only question remaining ; how and when will this junk mess unwind… or fall apart rather …..It will at one point, no doubt about it, fairy tales do exist occasionally but don t tend to last forever…
To make matters worse, the bond rating agencies almost always rate bonds safer than they actually are. During the Lehman collapse, many bonds went straight from investment grade to default.
“…the bond rating agencies almost always rate bonds safer than they actually are. During the Lehman collapse, many bonds went straight from investment grade to default.”
And then those bond rating agencies went out of business themselves!
Oh wait, they did not…
Regulatory capital rules and charter restrictions push certain investors into IG bonds so there tends to be a glut of interest in BBB’s as the highest yielding IG category. Corporations (and structured products originators for that matter) dial their offerings in to meet that demand. If you do not have those rules pushing you, there is better value in BBs and single-As.
As long as you can find someone else to buy it, what’s the problem? The computers will buy whatever comes along as long as the “news” is in line with what the algorithm says is the right decision, just like the marketing guys convinced retail traders to buy into the .com bubble, the housing bubble, the China bubble, and now the everything bubble.
Of course the news isn’t really news at all. I’ve noticed a decline of PR from businesses since 2008. Earning statements are about all you get. I remember the glory days of the financial press, CNBC’s money hunnies, the gigabytes from PR Newswire, and everyone watching Yahoo Finance all day. Now, the silence is deafening. Just spit out the numbers, the programs do the rest. Too bad we haven’t taught the AI that humans have a vested interest in manipulating the spreadsheets to make them look good.