Questioning the Value of Junk

-edited

I am in awe at how little extra yield investors are willing to take for junk bonds vs AAA-rated Bonds.

BBB rated are two steps away from junk status. The next stop is BBB-, then Junk.

BBB rated bonds yield just 74 basis points more than AAA rated bonds

BB- rated bonds, the third step into junk, yield 3.93% a measly 69 basis points more.

Bond Ratings

Bad Credit? Who Cares?

The Financial Times reports Yield-Crazed Investors Pile Into US Subprime Car Loans

Deals have been “going gangbusters” in subprime auto asset-backed securities (ABS), said Jennifer Thomas, an analyst at Loomis Sayles, a Boston-based firm managing $286bn of assets. At $29bn so far this year, issuance of subprime auto ABS is on track to surpass 2018’s record haul of $32bn, according to data from Finsight, despite softer sales of new cars and trucks this year.

These subprime card offerings are five or six times over subscribed.

Fed Watching Over You

Everyone seems to be assuming the Fed will not let another bond disaster as we saw in the Great Recession ever happen again.

Feelin' Lucky?

Mike "Mish" Shedlock

Comments (24)
No. 1-17
Sechel
Sechel

seems this is what happens after the Fed takes away the riskless lending rate. Happened during Q.E. and isn't the Fed back to that game now?

Sechel
Sechel

I've run analytics on subprime debt. I'm in awe how they seemingly can't break when stressed running multiple cdr's and severities. it almost defies logic

ReadyKilowatt
ReadyKilowatt

As long as you can find someone else to buy it, what's the problem? The computers will buy whatever comes along as long as the "news" is in line with what the algorithm says is the right decision, just like the marketing guys convinced retail traders to buy into the .com bubble, the housing bubble, the China bubble, and now the everything bubble.

Of course the news isn't really news at all. I've noticed a decline of PR from businesses since 2008. Earning statements are about all you get. I remember the glory days of the financial press, CNBC's money hunnies, the gigabytes from PR Newswire, and everyone watching Yahoo Finance all day. Now, the silence is deafening. Just spit out the numbers, the programs do the rest. Too bad we haven't taught the AI that humans have a vested interest in manipulating the spreadsheets to make them look good.

SpeedyGeezer
SpeedyGeezer

Regulatory capital rules and charter restrictions push certain investors into IG bonds so there tends to be a glut of interest in BBB's as the highest yielding IG category. Corporations (and structured products originators for that matter) dial their offerings in to meet that demand. If you do not have those rules pushing you, there is better value in BBs and single-As.

KidHorn
KidHorn

To make matters worse, the bond rating agencies almost always rate bonds safer than they actually are. During the Lehman collapse, many bonds went straight from investment grade to default.

FromBrussels
FromBrussels

...only question remaining ; how and when will this junk mess unwind... or fall apart rather .....It will at one point, no doubt about it, fairy tales do exist occasionally but don t tend to last forever...

thimk
thimk

some auto repo factoids : every 2.4m autos sold 1 mill repoed. big business. Greatest economy ever. maybe that is what is stunting new car sales.

pvguy
pvguy

The other possibility is that the BB level junk does not have all that high of a default risk. Is the default risk by rating available somewhere open to the public?

Je'Ri
Je'Ri

Picking up pennies in front of steamrollers.

Tony Bennett
Tony Bennett

It is different THIS time.

Freebees2me
Freebees2me

Mish - for a lot of reasons (actually there's too many reasons to provide even one), but it is different this time.

It's also important to note that we'll all see the exact same disastrous results, but the important factor is that it is different this time....as it is every other time as well...

And, yes, during this holiday season, I do feel lucky, particularly that I moved out of Illinois some years ago...

AWC
AWC

“Feellin lucky ?” Mish asks? Who, me?

Maybe the question should be “Feelin lucky, Mr. Powell?”

Seems the Donald has “capitalized“ the gains into his political account , and will “socialize” any losses into Jerome’s.

Meh,,,,nothing to fuss and fret about, it is, after all, an election year. Time to be lookin fer a rabbit’s foot, ‘er shamrock, ‘er lucky star will be after the election.

Party on.

Jackula
Jackula

And with negative rates being deflationary...very ugly setup

RobinBanks
RobinBanks

Just as bad in the UK with PCP personal contract plans. Next down turn I can see the market awash with cars that people cannot afford to keep up the repayments on. Largest car dealer has a share price of 11p for a reason.

leicestersq
leicestersq

I wonder how many pension funds are buying these? I expect that they are doing so out of desperation. The basic yields are less than the anticipated yields that they need to meet their obligations. The only way that I can see which will enable them to make up the shortfall is to borrow. I dont know if all pension funds borrow, but it wouldnt surprise me if a lot do.

If they get lucky and it doesnt blow up, then the ones that borrow will be grateful that they did. If it does blow up, and that leverage works in reverse, some pension schemes could collapse completely.

hmk
hmk

Another issue with these bonds is also the sheer volume of covenant light bonds. I believe the issuance of this type of bond has exploded also.