Zero Hedge
All posts from Zero Hedge
Zero Hedge in Zero Hedge,

Goldman Sachs Is Buying Carl Icahn's "High Yield Bond Bubble"

High-yield bond issuance has surged in recent days as 'wide' spreads have encouraged investors to take the dip once again (despite firms' record leverage and increasing desperation to roll the wall of maturing debt). However, it's not all guns blazing, as one manager noted, "while the market reopens, it reopens with issuers having to be a little more investor friendly." Despite Carl Icahn's warning that "the high-yield bond market is in a major bubble that's gonna burst," Bullard's "QE4" comments sparked Goldman to add US junk bonds and Aberdeen says selling EU and buying US corporate debt "is the trade that kind of screams at you right now." The dash-for-trash down-in-quality is back as CCC-demand surges and, as one trader notes the market's schizophrenia: "one day the market feels like it is shut down and you can’t sell anything and you wake up this morning and you can price any part of the curve."

There is nothing to fear but the lack of The Fed itself...

On the one hand...

Carl Icahn:

"The Fed is really holding the market up.... The Fed turned this market around here because it let it be known that the Fed funds rate isn't going to be raised in March. I am concerned about the high yield market, I think that's in a major bubble, but nobody knows when it's gonna burst..."

and on the other...

Goldman Sachs Asset Management:

GSAM dded to its U.S. junk bond holdings amid recent selloff, according to money manager’s head of Asia-Pacific fixed income Philip Moffitt, seeing U.S. as ‘Beacon’ amid the recent rout.


High-yield bonds more attractive than investment-grade debt, Moffitt says in interview in Sydney


Says underlying structure of U.S. growth is quite strong


GSAM is “reasonably constructive” on high-yield market in Asia


Says he’s “worried about China” and expects a higher risk premium on assets related to the country

Aberdeen Asset Management:

New issuance has been heavy but concessions generous: "There was a good 10 to 15 basis-point concession probably because the underwriters on both wanted to get the deals done, done properly, and have them trade well."


"We have been sort of on the margin selling a little bit of euro to buy dollar securities but it hasn’t been wholesale yet. But that is the trade that kind of screams at you right now."


"Defaults are going to remain quite benign and with yields approaching 6.5 percent for high yield, it is tough not be interested in talking about good double BB and single B companies,” he said from London. “I still think high yield’s good value, and it is a lot better now."


"We are using this as an opportunity to put money to work, we are reducing some of our loan exposure and buying high-yield bonds. Where we have the discretion to add high yield to our investment-grade accounts, we are using that as well.”

And then there's this from Citi's Matt King:

The following sums up the scizophrenia nicely:

“The market is very forgiving,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “One day the market feels like it is shut down and you can’t sell anything and you wake up this morning and you can price any part of the curve. The market is very open.”

As everyone jumps back on the down-in-quality, dash-for-trash trade:

57% of two-way flow in single-Bs has been client buying, followed by 53% in CCCs, Trace shows.

*  *  *
On a side note, the marked swings in Treasuries of the last 3 days suggest notable rate-locks as banks hedge (and unwind) rate risk from the expected issuance (hedge into issuance, unwind on post)


*  *  *

And remember, our dream-crushing discussion of the rise in cash on corporate balance sheets

US companies are carrying far more net debt than in 2007


Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.


In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.