Credit Market – signs of trouble

Posted: August 25, 2014 in Uncategorized

I am starting to pick up signs of stress from the US high yield credit market – actually since the start of the year, but since Argentina they have substantially increased and now they are worth talking about.

The Quantitative Easing had, as a side effect, a booming effect on credit markets.

Credit markets are usually “professionals only markets” – in practice it is high yield bond issued by low grade investment entities (junk bond). It can be Argentina, but it can be a non-investment grade company.

Often this bonds have been used to do company buy-back which per converse improve the look (not the substance) of the company (Earning per Share…less shares more earning) and pushed the SP 500 to all times high.

But also in the big end of the market something is not right.

There has been a huge decrease in so called Risk Premia (the yield on European bond fell between 150 and 300 bps)

US T Bond are around 2.4%pa – while in a recovery historically have been around 4%pa.

The last time this situation happened we were in a much more benign situation, but still the yield on US Treasuries increased by 200 points in less than a year.

 

This would have consequences on everything: in Australia at the start of 1994 inflation was approx 2% and by 1996 was 5%.

As share market in 1994 happened…well not much at all. The market lost something, but nothing to talk about.

But everything was smaller and less integrated. Also there were no high tradable exchange traded fund in the US High Yield Bond Market…which is not highly liquid.

Which means that such an unwind of credit market position would have a different effect on stock market than in 1994.

Another issue to take into account when building a portfolio!

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