As expected, this week saw a deluge of new high-grade supply, with the US investment grade primary market buzzing to the tune of nearly $50 billion post-Labor Day.
That takes the total for 2020 even further into record territory, as the Fed’s unprecedented backstop for the US corporate bond market continues to stoke demand, which in turn translates to ever lower borrowing costs, in a virtuous loop.
Of course, that depends on your definition of “virtuous”. Record supply also means an already over-leveraged US corporate sector is now even more stretched, prompting some to fret that the ~$1.6 trillion in new debt taken on in 2020 won’t all be serviceable, especially if the economic recovery doesn’t proceed as optimists hope.
On the demand side, Lipper data out Thursday afternoon showed high-grade funds raking in another $6.54 billion in the week through September 9.
That’s down from last week’s record $10.7 billion haul, but it’s still more than respectable. It also marks the 22nd consecutive weekly inflow for IG funds. The total since mid-April is now nearly $142 billion.
Junk funds, on the other hand, suffered their largest outflow since July 1, losing $770 million.
For what it’s worth (which isn’t much) Jeff Gundlach this week warned that high yield defaults may rise. I’ve stopped dedicating much coverage to Jeff’s state-the-obvious-a-thon webcasts, but suffice to say he raised familiar concerns about fallen angels and leverage.
Meanwhile, money market funds just logged a fifth week of outflows, according to the latest data from ICI.
Following a $45.2 billion exodus from “cash” in the week through September 2, the period through Wednesday saw an additional $26.45 billion come out of government and prime funds.
That brings total assets in money market funds to $4.47 trillion, down more than $105 billion in the last five weeks.
It’d be nice if some of the money, like maybe 5% of it, a laughably low figure, I know, but you get the point, that these companies are issuing would go to R&D, product development, and other capital expenditures. We are going to need at least one new industry, preferably two or more, in order to spur productivity and job growth. My SS later in life is depending on it.
Once this COVID thing passes, we are going to need to figure out how to create tens of millions of jobs over the next decade. We need innovation and investment. If we don’t get it, there are only going to be so many dishwasher jobs at Taco Bell to go around.
Here’s one growth opportunity:
Undercover (old factories rehabbed) Production Agriculture. 35 X’s the annual yield, organic, 80% water use reduction, nearly closed-loop nutrient capture, on-site energy supplement (rooftop wind/solar), stable workforce.
There are more people living on this planet than have died over the timespan of recorded history.
And they all need ~2K in calories everyday.
It doesn’t take a genius to solve a problem.
Like this idea, but probably not large enough scale to weigh on the growth side.
I know it’s an increase in the ratios, but does anybody know how much of this deluge is to cover calls of bonds that were issued at higher rates?
I would also like to know how much went to buying back stock. Difficult to tease that information out quickly but over time some good analyst should be able to make a reasonable estimate.
buybacks have plunged.
Although data is not the plural of anecdote, a lot of the REITs and MLPs I follow are just issuing / buying bonds to stretch out their maturity schedules.
I suspect corp credit issues down the road (2-5yrs) will make the resi real estate issues of the GFC look tame. The money was raised prior to Covid to buy back stock to a large degree and sustain declining businesses. NOT productivity enhancing or innovation enhancing (Eco growth). Resi real estate was also an unproductive asset that did not create productivity or innovation.
Now we have an over levered corp that hires, gives raises, buys equipment, facilities, etc. as cash flow is slow to recover corps will have to shift those resources to dealing with their debt burden.
The Fed checked in to the Hotel California and can’t ever leave.
It will probably be the cause of the next crisis and will again be deeper than the priors as we never deal with our issues only paper over them.