STAFF NEWS & ANALYSIS
Pay Attention to the Upcoming Bond Bust, Not the So-Called Junk Boom
By Staff News & Analysis - February 18, 2013

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.

After Thoughts

This is the issue people should be paying attention to, not the return of the junk bond market.

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