On the coming credit meltdown."In recent months, lower credit bonds--vonventionally defined as BB+ and below--have traded at a smaller risk premium (as compared to U.S. Treasuries U.S. Treasury Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. ) than ever before in history. Over the past 20 years, this margin averaged 5.42 percentage points. Shortly before the Asian crisis in 1998, the spread was hovering hov·er intr.v. hov·ered, hov·er·ing, hov·ers 1. To remain floating, suspended, or fluttering in the air: gulls hovering over the waves. 2. just above 3 percentage points. Earlier this month, it touched down at a record 2.63 percentage points. That's less than 8 percent money for high-risk borrowers." "In 2006, a record 20.9 percent of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a 'C.' So far this year, that figure is at 33 percent. No exaggeration is required to pronounce pro·nounce v. pro·nounced, pro·nounc·ing, pro·nounc·es v.tr. 1. a. To use the organs of speech to make heard (a word or speech sound); utter. b. unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower." "Why should so many theoretically sophisticated lenders be willing to bet so heavily in a casino with particularly poor odds? Strong economies around the world have pushed default rates to an all-time low, which has in turn lulled lenders into believing these loans are safer than they really are. Just 0.8 percent of high-yield bonds High-yield bond See: Junk bond high-yield bond See junk bond. defaulted last year, the lowest in modern times. And with only three defaults so far this year, we've luxuriated in the first default-free months since 1997. By comparison, high-yield default rates have averaged 3.4 percent since 1970; higher still for paper further down the totem pole totem pole Carved and painted vertical log, constructed by many Northwest Coast Indian peoples. The poles display mythological images, usually animal spirits, whose significance is their association with the lineage. Each figure represents a type of family crest. ." "The surge in junk loans has also been fueled by a worldwide glut glut pronounced as rut, slut Vox populi An excess of a service or skilled labor in a particular area. See Physician glut. of liquidity that has descended more forcefully on lending than on equity investing. Curiously, investors seem quite content these days to receive de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters. compensation for financing edgy companies, while simultaneously fearing equity markets. The price-to-earnings ratio Noun 1. price-to-earnings ratio - (stock market) the price of a stock divided by its earnings P/E ratio securities market, stock exchange, stock market - an exchange where security trading is conducted by professional stockbrokers for the S&P 500 index is currently hovering right around its 20-year average of 16.4, leagues below the 29.3 times it reached at the height of the last great equity bubble in 2000." "Some portion of this phenomenon seems to reflect tastes in Asia and elsewhere, where much of the excess liquidity resides: Foreign investors own only about 13 percent of U.S. equities but 43 percent of Treasury debt. In search of higher yields, these investors are moving into corporate and sovereign debt. Today, the debt of countries like Colombia trades at less than two percentage points above U.S. Treasuries, compared to 10 percentage points five years ago." --Steven Rattner, Wall Street Journal, June 18 |
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