News & Analysis
Pay Attention to the Upcoming Bond Bust, Not the So-Called Junk Boom
How a junk bond bubble is driving a buyout and merger boom ... The merger and buyout boom of 2013 is upon us! Some of America's biggest companies are coupling up faster than frisky teenagers at their first unchaperoned party. On Thursday alone, Warren Buffett's Berkshire Hathaway and private equity firm 3G Capital announced a $23 billion purchase of H.J. Heinz Co., the iconic producer of ketchup and other fine foods, and American Airlines and US Airways announced a merger. Earlier in the month, Michael Dell and private equity firm Silver Lake has announced a plan to buy PC maker Dell back from its public shareholders for $24 billion, and Comcast bid $17 billion to buy the remainder of NBC Universal from General Electric it didn't already own. – Washington Post
Dominant Social Theme: Let the good times roll. American capitalism is back and bigger than ever.
Free-Market Analysis: Two issues need to be clarified about the current junk boom. First, it doesn't exist and second, you ought not to want it to.
The modern junk bond market, when it is really in evidence, is a multi-trillion dollar entity. A few deals do not a resurgent junk bond market make, no matter how hopeful bond-market writers want to be.
And this idea that the market – and its instrumentalities – are rebounding is as dangerous as it is pernicious. US central banks have dumped tens of trillions into the larger economy and most of this money is still trapped in banks that have yet to distribute it.
But be careful what you wish for. When these funds begin to circulate, central banks will be impelled to raise rates. This will cause a further recession and also reveal more fully the reality of the Modern Age – that the reign of King Dollar is over.
The dollar died in 2007-2008. Central banks the world over have continued the dollar reserve system only by flooding economies with currency. Monetization has substituted for solvency.
But that cannot go on forever. Once rates rise, countries like the United States will find it impossible to service debt. Debt service will begin to occupy most of the federal budget.
This article, with its excitement over the return of the debt market, should be examined in light of these larger facts, as explained above. One is exposed to such enthusiasm and wonders why a major paper like the Washington Post would publish such wrongheaded stuff. Here's more:
What many of the deals have in common is that they are being unleashed by a surge in corporate credit. The markets for bonds in even risky companies are becoming unfrozen to a degree they haven't been in half a decade, and there seems to be some pent-up eagerness to do big deals. It's a lot easier to make a buyout or merger work when bankers and bond investors are so eager to lend you the money to make them happen.
In effect, the spate of deals is a logical byproduct of what investors in the bond market are doing: Throwing debt at corporate America, even those without good credit ratings, on highly favorable rates. This is most apparent in the market for junk bonds, debt issued by companies that are considered risky bets by the credit rating firms.
Investors are so eager to buy that debt that "high yield" isn't all that high. On Thursday, junk bonds were yielding only 6.09 percent, based on a Bank of America-Merrill Lynch index. Compared to the roughly 2 percent that 10-year U.S. Treasury bonds are paying, that means that investors are getting only about 4 percentage points of extra compensation for lending their money to risky companies rather than the U.S. government.
That's not as low as this "risk premium" was during the bubble-licious days right before the crisis − but remains below its typical levels for the last 15 years or so.
This article has all the faux-excitement that the mainstream media has adopted lately as it tries to flog the idea that an economic recovery is underway in the US.
One gets the idea that they want to proclaim the same recovery is available in Britain and Europe if only they could. But what cannot be gotten around is the hard fact that when a "recovery" really takes place, trillions in dollar-currency will begin to circulate and central banks will have to snuff out any emergent up-turn with aggressively higher rates.
There is not going to be a recovery. The top elites that seek to create world government have brought us to this point but, in our view, are not clear about what to do next. What we call the Internet Reformation has greatly destabilized the one-world conspiracy, making its progress increasingly questionable.
At the same time, these top elites continue their work of economic destabilization. The struggle – as always – seems to be to not go too far and too fast. For this reason, apparently, the bought-and-paid-for media that projects their messaging is trumpeting the idea of a "recovery."
The system's integrity must be maintained at all costs, even when the reality is evidently and obviously different – even when central banking elites actively work to undermine the system they have created.
What is going to take place eventually is a massive bond BUST. The bust will be centered on sovereign bonds, not junk bonds, as it is sovereigns that have been issued in such massive quantities. People still believe in the safety and security of US Treasuries (also gilts, etc.). But when (not if) interest rates rise, those bonds will lose significant value.
Conclusion: This is the issue people should be paying attention to, not the return of the junk bond market.
l 
|
You must be a site member to submit suggested edits or post feedback. In addition to submitting edit suggestions and posting feedback, your Free Membership to The Daily Bell gives you access to our Member Zone where you will discover a plethora of other member benefits. Want to learn more? click here |
|||||
|
|
||||
 |
Posted by Dilence Sogwood on 02/19/13 08:18 PM
You guys are getting sharper all the time!
The so-called junk market is definitely yielding less now due to sovereign yields, but these are private companies that must perform to survive. Principle risk is the risk of default.
The quoted article implies 2 things: 1 that a few LBO deals will sink the junk market. 2 rate risk will sink the junk market.
On the LBO point, we are talking about less than 5% of the market. The target companies are currently A rated.
On the rate risk argument, the junk market typically produces positive returns in rising rate environments. Chew on that.
Also be aware that when we talk of junk companies, we are talking about companies that are $1-$3 billion in equity market capitalization. "Junk" is a terrible term left over from really a different non investment grade market prior to 1986.
DB good job spotting the obfuscation.
|
Posted by Danny B on 02/19/13 10:49 AM
@ rmp, you bring up a great point on currency. There are not all that many instruments that can be considered MZM,,, money of zero maturity. This is an important aspect of currency.
FOFOA has good insight on "moneyness"
Click to view link
Click to view link
Since the dollar is a debt instrument, even a paper dollar is actually a credit instrument. BTW, look at Argentine to see how pension funds are systematically stolen.
|
Posted by rmp on 02/19/13 09:11 AM
"You mean fedgov can coerce bond buyers into holding their securites? The vastness of the market probably means it is beyond their control. They can certainly freeze the market, enact price fixes, etc. But that still will not insulate people from the losses that they will eventually take ... "
What of the idea floating around of the forced buying, or confiscation of IRA's and other retirement instruments similar to what was done back in 33 with gold? Wouldn't that support what is needed, especially with Americans? Also, one comment made recently was interesting concerning the dolllar and it's demise. Currently it's credit expansion that's being inflated not actual currency. So, currency is needed to pay for expanded credit. Therefore currency will remain valuable because that's what you need to pay for credit expansion. So, when you think about it, default is about bonds and debt instruments and not the currency even though technically both are related. The euro being an example. You've got a basket case of debt and bonds, sovereign mismanagement yet the currency is up in value. Why is that? One could argue you need currency to service the debt, therefore currency over rules debt instruments. Same here with dollar, it will remain valuable, or outlasts the other instruments. Final battle comes with gold at reset table?
Just asking.
|
Posted by EBS on 02/19/13 01:41 AM
Click to view link
One People's Public Trust Lawfully Forecloses Corporations, Banks and Governments for Operating Slavery and Private Money Systems
17 February 2013
By Andy Whiteley
Co-Founder of Wake Up World and Being of the Creator
Many of you have heard… many have not. Announced publicly on 25 December 2012, the system of Corporate-Governmental rule has been foreclosed. Legally foreclosed… via one of its own mechanisms. The 'Powers That Be' are now the 'Powers That Were'. All debt has been erased and corporations - including but not limited to Corporate Governments and Banks - have been foreclosed.
Sure, they may continue to play along in hopes we will play along with them. But thanks to a series of UCC (Uniform Commercial Code) filings made by the One People's Public Trust (known as OPPT) the choice is now yours to make. A new framework for social governance is now in effect; a fact that has been ratified by the 'legal' framework of its corporate-controlled predecessor.
Systemically speaking… WE ARE FREE!!
Click to view link
|
Posted by Danny B on 02/18/13 11:16 PM
Much of the foreign held bonds are 90 day paper. If they are not rolled over, somebody has to come up with $ 7.6 trillion... . $ 3 trillion just for Japan. $ 2.8 trillion for U.S. (old numbers). The Basel II requirements would have required banks to buy $ trillions of U.S. debt because it is HIGH quality. har har ... Basel II has been postponed because nobody has the bucks.
The FED is buying lots of new issuance but, rollover of current holdings is another story. GOV wants a $ trillion coin because the FED just isn't buying enough. It is likely that Japan will fall first and take out the system.
China is dumping dollars worldwide to buy tangibles. With a shrinking of global transactions done in the dollar, many states can dump dollar instruments. That would affect bond rollovers.
The U.S. answer to this is to ?force? Japan to rattle sabers with China and promote regional arms sales. It helps the bottom line. Japan signed the ASEAN pact with China. I doubt that the saber rattling is done with any conviction. Japan doesn't care about the stupid islands. We shall see.
|
Posted by Reggie CidalOne on 02/18/13 10:22 PM
I forgot to add, I was not considering the outstanding bonds being held by foreigners and the public. I am not sure how big that market is, or if the fed would dare to monetize those in a sell off.
|
Posted by Reggie CidalOne on 02/18/13 10:19 PM
How is it that rates will rise? The fed supposedly buys 90 percent of government paper now. If the remaining 10 percent of the market sells off, it doesn't seem like much of a stretch for the fed to monetize the remainder. Yes that would continue to be inflationary, but rates would stay near zero. The only way I see an interest rate rise when the fed is monetizing the whole shot is if TPB wants to crash the system at some point by a rate rise. They already appear to want to crash the system by inflation. So I don't see a rate rise, I see a system reset before a rate rise.
Reply from The Daily Bell
The Fed (and other central banks) will be faced with a necessity to raise rates to choke off price inflation and cool economies as they gradually heat up due to US$50 trillion being dumped into bank coffers, etc. No other way to control rising prices and an expansive economy is there? But we agree, the system may be reset before it gets to that. Or the chaos that would result might be used as an excuse for a global currency ...
|
Posted by Danny B on 02/18/13 10:07 PM
"but, in our view, are not clear about what to do next."
I believe that the PTB have seriously miscalculated. The well-planned crash of the Euro was supposed to bring unity,,, after the crash.
The "collective" was supposed to be a dawning panacea. I do not believe that that idea holds very much charm today. Iceland certainly stands out as a wake-up call.
Too many brain-dead world-improvers claimed that nationalism was the source of all the wars. Not true,,, BANKERS are the source.
Click to view link
They forced many countries to flood themselves with hordes of immigrants who would never assimilate,,,, to destroy national pride and nationalism.
This worked,,, up to a point. BUT,,,
Currency wars are a product of nationalism.
The currency wars, outside the Anglo-American, sphere prove that survival is still alive and well. Beggar-thy-neighbor is nationalism and survival. True, the CBs are printing in unison,,,, but, not in cooperation. Germany is not cooperating. They do not like Versailles-without-the-war.
The PTB expected a LOT more cohesiveness and a LOT less fracturing.
They very well may have expected/caused the bond market crash.
Click to view link
I do not believe that they expected fiat currency to die such a gruesome death that the world would completely reject fiat.
CBs sold gold in unison ... except for Germany. The idea was to have unfettered currency expansion to finance unfettered growth of the state. That plan quickly took on the odor of the loo on a garbage scow. Now, the CBs are buying the most gold in 60 years.
Click to view link
Nigel Farage has done a good job of hoisting up the world-improvers for a good dose of ridicule.
The internet can claim a lot of the credit for exposing the plans of the collectivist parasites. The computer can claim a LOT of credit for making a reserve currency unnecessary. It was impossible to do the millions of price-checks on a daily basis to assign a true value to a currency. Now, it is easy.
That is why the FOREX is expected to crash in a big way.
America has 500 million square feet of EMPTY retail space.
Soon, to have a lot more.
Click to view link
The consumer has left the scene. Equities can't do well for long without the consumer.
Investors see the looming crash and try to pour cash into anything that seems halfway viable. Junk bonds are still junk though. The tech crash proved that.
Just as global warming proponents left out a LOT of variables ... The proponents of the world-state have not included some important variables in their calculations.
Reply from The Daily Bell
Interesting,thanks.
 |
Posted by Abu Aardvark on 02/18/13 05:05 PM
"France Plans To Prohibit Cash Payments Over €1,000"
Click to view link
|
Posted by andi3412 on 02/18/13 04:00 PM
I very often see people (in this case you) make the point that they have to rise interest rates when the bailout-money, at the moment still in the banks, starts flowing into the system.
I dont see why a criminal government should not be able to do that in their own will and at their own time. When I read about merger&acquisition something else comes into my mind: This might be the beginning of a Crack-Up-Boom, where big companies are getting into a few pivate hands alone. The shareholders get bought out with 20% more and think that they are lucky; but where will the money end up? In bonds, at the end. And only much later on, when the whole public owns all bonds but all companies/values are in the elites hand, then the bonds will surprisingly come down. That will manage to get the property down then and the owners bancrupt. The property will end up in the FED then.
I cant find the slightest reason why THEY should not be able to keep the bond-bubble up as long as they decide.
The bonds will remain strong until they stop printing. They will stop printing when they decide so. They will decide so when they find they got enough to confiscate. Makes sense?
Reply from The Daily Bell
Sooner or later it will be unsustainable. When rates rise ...
 |
Posted by 1776 on 02/18/13 01:33 PM
February 18, 2013
The Obama Bankruptcy Curse Strikes Again! Jeannie DeAngelis
Click to view link
|
Posted by secrettop2013 on 02/18/13 09:38 AM
daily bell,
i am naive but answer me... If us govt can threaten its people with militarized police and dictatorial power through legislation(NDAA,patriot act,NSA,TSA,military commissions act),if it can bomb few countries out of existence at will,why it will not threaten bond holders? what exactly is stopping them from not killing few errant bond holders who want to dump treasuries?
If feds can pump 4 billion per day into stock markets,trillions into banks,have they not thought about inconsequential thing like bond bubble?
i still remember case of 6 trillion treasuries caught by italian police and some billions worth of us treasuries held by indian man.
Click to view link
Click to view link
Click to view link
Reply from The Daily Bell
You mean fedgov can coerce bond buyers into holding their securites? The vastness of the market probably means it is beyond their control. They can certainly freeze the market, enact price fixes, etc. But that still will not insulate people from the losses that they will eventually take ...
