Counterparties: Borrow as fast as you can

May 20, 2013

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American companies have gotten the message from the market: borrow as much as you can, as fast as you can.

So far this year, $315 billion of investment grade bonds and $124 billion of junk bonds were issued, according to Thomson Reuters data, respective increases of 36% and 17% over the same period last year. The massive syndicated loan market is up 13% to $654 billion over the same period. Those numbers don’t include the blazingly hot convertible-bond market, or foreign issues like Petrobras’s monster $11 billion bond last week.

Even as debt issuance booms, however, Reuters’ Mike Dolan reports that finding an actual bond in the wild isn’t necessarily easy. “JPMorgan estimates that the world’s central banks and commercial banks… hold some $24 trillion worth of bonds — or 55% of the entire $44 trillion universe of government, asset-backed and corporate bonds”.

Sober Look says that low rates have pushed companies to borrow, even if they don’t have a use for the capital — debt and cash are piling up on American balance sheets. John Kay attributes growing cash piles to a decline in truly capital-intensive US businesses, like heavy manufacturing. Soaring debt issuance, he thinks, is “more likely related to financial engineering, or the acquisition of existing assets, than to new investment”.

On cue, there are worries about excessive risk-taking by banks and the “reach for yield”. The bond rally is vulnerable, according to the WSJ’s Richard Barley, “since it isn’t driven by fundamental factors.” The Contrarian Corner comes to a more nuanced conclusion. Some portions of the bond market are overpriced (CCC), others aren’t (BB), because investors “can’t resist a high-coupon and overestimate their ability to pick the bond that won’t default”. — Ben Walsh

On to today’s links:

Bloomberg is already comparing the EU oil trading scandal to Enron – Bloomberg

Steve Cohen is considering a deal with authorities that would shut his fund to outside investors – Bloomberg
Cohen has been subpoenaed to in the SAC insider trading investigation – DealBook

Yahoo plans to be “hands off” after buying Tumblr for $1.1 billion – Kara Swisher

Ben Bernanke instructs graduates to be optimistic about the future, invoking Keynes (and robots) – The Fed

How Jamie Dimon became a risk factor – Justin Fox
Tuesday’s JPMorgan vote could be an “inflection point in shareholders’ push for greater say in the boardroom” – DealBook

You’re more likely to get a high-skilled worker visa as a model than as a computer programmer – Bloomberg

The end of the car and the labor force participation rate – Joe Weisenthal

Great Headlines
Big rig carrying fruit crashes on 210 Freeway, creates jam – LAT

A law professor is taking on telecom monopolies – NYT

Primary Sources
New paper suggests the Fed find some central bankers who understand how the economy works – Romer and Romer
The Senate report on Apple’s offshore tax strategies – US Senate

Gold and the “wedge between financial markets and economic fundamentals” – Mohahmed El-Erian
A rant on why money isn’t “easy” – Scott Sumner
Time to start worrying about the recoveryless recovery – WSJ

EU Mess
No, Greece isn’t turning the corner – Megan Greene

And, of course, there are many more links at Counterparties.


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