Counterparties: Borrow as fast as you can
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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:
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
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
And, of course, there are many more links at Counterparties.