Bond Hubris Overwhelms Fed in Riskiest Credit-Market Sectors – Bloomberg 08-12-13

Salient to Investors:

S&P’s Capital IQ Leveraged Commentary and Data said the market for covenant-light loans has already soared to $155 billion this year, beating the record $96.6 billion in 2007. The lowest rated junk bonds were the greatest percentage of speculative-grade offerings last month since 2011. Bank of America said funds that purchase speculative-grade, or leveraged, loans in the US attracted the second-biggest inflow on record. This recent activity is raising concern, but it does not match the frothiness of 2006 and 2007.

Christopher Sullivan at United Nations Federal Credit Union said tapering is a risk-management issue as opposed to a pure economic issue because the Fed has not really met its employment or inflation mandates.

Krishna Memani at OppenheimerFunds said issuers in the leveraged-loan market today are in much better financial shape than they were in 2007, and likes credit in all forms, including investment-grade and high-yield company debt, emerging-market bonds and structured credit.

Moody’s said corporate default rates near historic lows are generating a sense of complacency among investors.

Dominic Konstam at Deutsche Bank said unlimited QE without the risk of any tapering or end in sight is unnecessary given that risky assets are somewhat elevated and that the downside economic risks that existed at the end of last year, such as Europe and the fiscal cliff, have clearly gone.

Michael Materasso at Franklin Templeton Investments said most risk assets have retraced 75 percent on average of the widening that occurred in the late May and June period, and is buying higher-rated company debt, municipal bonds and securitized credit. Materasso said with slow global growth, people are looking for yield and investors are making decisions that they normally would not and can get burned badly given how low yields are in the absolute sense.

Lawrence McDonald at Newedge USA said investors convinced the Fed will keep interest rates low through 2016 are more willing to take risk and add leverage, forcing the Fed into a balancing act to encourage lending while preventing bubbles. McDonald expects the Fed will taper in September.

Read the full article at  http://www.bloomberg.com/news/2013-08-11/bond-hubris-overwhelms-fed-in-riskiest-sectors-of-credit-markets.html

Click here to receive free and immediate email alerts of the latest forecasts.