Massive Issuance Of High Yield Bonds
Companies raised a staggering $11.7 billion last week in the high yield bond market. This represents an all time record, eclipsing the prior mark of $11.4 billion set in 2006 during the credit boom. In 2009, 11% of high-yield issuers defaulted, so this development indicates that the risk trade is back in style just a year after the worst financial crisis since the Great Depression. Most of the cash raised by selling new issues is being used to repair balance sheets and pay down existing debt.
Barry Ridings, of Lazard Freres & Co., called the deals "the ultimate Hail Mary passes." The average spread between U.S. Treasury bonds and high yield bonds stands at about 6 percentage points. At the peak of the financial crisis this spread was around 22 percentage points. When the capital markets recovered, savvy junk bond investors made a fortune. Many, however, believe that there will be another day of reckoning in the high yield market.
"They're all yield junkies," said Mr. Ridings of Lazard. "Did everyone forget that 2008 happened? Talk about a short-term memory loss on the part of the buyer." It would appear that this trend could be a harbinger of things to come in the capital markets. It would not be the least bit surprising to see risk levels, leverage, and speculation return to pre-crisis levels in short order. If you are an investor, be very wary of these developments.
