Twice. That’s how many times during the first two days of this week I addressed what certainly seems like froth in corporate credit. Today will mark three times in three days.
This is a subject that perpetually begs to be broached. The Fed’s backstop for the US corporate bond market slammed the brakes on a burgeoning catastrophe in March (when spreads ballooned wider in multi-standard deviation moves and popular ETFs started trading well wide of NAV), ushering in a period of virtually uninterrupted inflows to credit funds and massive supply from corporate borrowers.
In turn, Wall Street’s traders and investment bankers enjoyed a windfall during the second quarter (figure below) even as banks set aside more than $30 billion for losses tied to the crumbling economy.
This week, can maker Ball Corp. set a junk deal record, pricing $1.3 billion in 10-year notes at just 2.875%, a sign of the times.
Overall, junk yields are near record lows (on the index). Even CCCs traded inside 1,000 bps this month. The “junkiest” of junk is no longer in distress.
Well, on Wednesday, the market was set to hit another milestone. With a trio of deals worth around $2.7 billion set to price, YTD junk issuance was poised to surpass the entirety of 2019’s total of $269 billion.
That is a remarkable statistic on its own. And, embedded within the headline figure are a number of additional milestones.
Regular readers will recall that June was the busiest month for high yield issuance on record.
As of Tuesday, issuers had sold nearly $31 billion in high yield debt this month, a new record for August.
Let that sink in. It took just seven business days for this month to break the all-time record for August junk supply set in 2012.
You could applaud Jerome Powell. Or you could throw tomatoes at the stage. It depends on your penchant for decrying moral hazard.
Wow. The amount of those inflows are just amazing. Maybe the Fed overplayed their move a bit.
We should be about entering the period where we’ll start to see more insolvencies (even more!). Will be interesting to see if stories come out of recent issuers of junk declaring some form of bankruptcy within months of issuing.
Did Hertz show the way with their aborted share issue?
Kodak should come to market any time now….
moral hazard indeed. ppl used to talk about it in 2010, but last year or so larry summers was like, so what?. so the lesson being learned for the millenials is the gvot will always bail you out…dont save, just seek credit. the term moral hazard will have no meaning in another few years, as there may not be evidence of the ‘hazard’ part.
and when was it written into the fed Act to help investors behave ‘better’….they sold it all like nyc had been leveled…and the fed says, no I”ll give that collateral fulll price, encouraging everyone to buy it back. people who had cash on hand to buy low, as were supposed to try, got screwed. no creative destruction…no outsized gain for the new cash…just continued low gains for those embracing the hazard.
It seems a large portion of this will find it’s way to the stock market as companies buy their shares.