Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody’s considers “highly speculative,” as opposed to “non-investment grade speculative.”
“This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default,” she wrote. “These companies are poised to default when credit conditions eventually become more difficult.”
Remember in 2008 when Moodys and the ratings agencies were so far behind the game? Its now so obvious even they are sounding the alarm.
Rate-hike cycles are akin to shaking a tree full of overripe fruit, says Deutsche Bank’s Ruskin
A financial planning manager in a major Shanghai bank branch points to a flickering computer screen displaying a list of wealth management products for customers wanting a higher yield to normal deposits.
For a deposit of 100,000 yuan ($20,600), he recommends a “low risk” product with an interest rate of 4.25 per cent over one year. Alternatively, the customer can opt for a riskier 4.75 per cent yield but there is no guarantee they will get any of their money bank. The customer is advised to act fast as yields are falling rapidly following closer government scrutiny of China’s savings products since March.
However, it is outside the country’s marble-floored bank branches where millions of middle-class Chinese consumers are deciding where to place their savings. Like most transactions in China, the smartphone is the tool of choice when deciding where to park your savings.
These seemingly innocuous offerings are not sold on street corners by shady salesmen but peddled legally through the country’s commercial banks. They are popular with China’s middle classes for their high returns and low default rates. Most customers seem oblivious to the risks.
I think risk aversion is starting to set in in this new bear market.
After this week’s selloff in Italian sovereign debt, 90% of the country’s high-grade corporate bonds now earn a lower yield than government paper, according to an analysis by Bank of America Merrill Lynch.
In other words, investors appear to view Italian corporate bonds as less risky than their government peers.
That flies in the face of the expectation that governments are more creditworthy than corporations. Backed by the full faith and credit of the government, with its tax-raising abilities, government debt should usually feature a lower yield than those offered by corporate debt to reflect a lower risk of nonpayment. Even in countries without gold-plated credit ratings such as France and Spain, nearly all of their government bonds trade at a lower yield than their corporate counterparts.
“In the credit market we’ve been struck by the extreme relative value gap that’s opened up between Italian [corporate credit] and Italian sovereign debt during the last week. Italian credit spreads have held up incredibly well vis-à-vis [Italian government paper], amid the volatility,” said Martin Barnaby, head of European credit strategy at Bank of America Merrill Lynch.
— Holger Zschaepitz (@Schuldensuehner) May 26, 2018