The Great Unwind Has Begun, Bankruptcies Soar
The Great Unwind Has Begun, Bankruptcies Soar
by Wolf Richter August 7, 2015
The junk-bond market lost money in July. Not a lot, 0.62%. But it did so after having already lost money in June. It was the third losing month so far this year, despite their high coupon payments that make these bonds look so juicy to yield-desperate fund managers.
Until recently, they were superb investments, riding up the credit boom. Junk-bond guru Marty Fridson, CIO of Lehmann Livian Fridson Advisors, explained in a note for S&P Capital IQ LCD (behind paywall; some reports are at LCDs free highyieldbond.com):
Strategists frequently take the easy way out in their year-ahead outlooks by predicting that the high-yield market will earn the coupon. At this stage, 2015 is shaping up as another year that makes false prophets of those who assumed, in the face of overwhelming experience to the contrary, that it would be free of both positive and negative shocks.
But its just the timid beginning.
The Fed hasnt even raised interest rates yet, and the largest credit bubble in history continues to inflate. But it has begun to hiss hot air at the margins where the riskiest junk bonds, rated CCC or below, have plunged in value and where average yields have soared from a ludicrous low of 8% a year ago to over 13% now. That rout is far from over.
No matter how terrible and obvious the risks, fund managers, driven to near insanity by the Feds zero-interest-rate policy, held their noses and closed their eyes and picked up the worst junk, thus continuing to fund over-leveraged, money-losing, cash-flow negative companies that should have been restructured or liquidated years ago. ...............(more)
http://wolfstreet.com/2015/08/07/the-great-unwind-has-begun-bankruptcies-soar/