Central Banks Warn: Liquidity May Evaporate When Investors Finally Remove Blindfolds

[marmar]

Central Banks Warn: Liquidity May Evaporate When Investors Finally Remove Blindfolds
by Wolf Richter • March 27, 2015


Companies are selling bonds like madmen. This year through Tuesday, investment-grade and junk-rated companies have sold $438 billion in new bonds, up 14% from the prior record for this time of the year, set in 2013, according to Dealogic. This quarter is already in second place, nudging up against the all-time quarterly record of $455 billion of Q2 2014.

About $87 billion of these bonds funded takeovers, a record for this time of the year, the Wall Street Journal reported. The four biggest bond sales in that batch were for healthcare takeovers, including the Actavis deal whose $21 billion bond sale was the second largest in history, behind Verizon’s $49 billion bond sale in 2013.

Actavis had received orders for more than four times the bonds available, according to CFO Tessa Hilado. “You don’t really know what the demand is until people start placing their orders,” she said. “I would say we were pleasantly surprised.”

Brandon Swensen, co-head of U.S. fixed income at RBC Global Asset Management, couldn’t “see anything on the radar that’s going to slow things down materially,” he told the Wall Street Journal. His firm expects rates to “remain low.”

All of the investors chasing after these bonds expect rates to remain low. Or else they wouldn’t chase after these bonds. If rates rise, as the Fed is promising in its convoluted cacophonous manner, these bonds that asset managers are devouring at super-high prices and minuscule yields are going to be bad deals. And their bond funds are going to take a bath.

But companies are selling bonds as if there were no tomorrow. They’re thinking that rates will not remain low. They’re trying to get these things out the door cheaply while they still can. They’re on a feverish mission to take advantage of these ludicrously low rates while they’re still available. And they use this cheap money to buy each other and to repurchase their own shares to pump up share prices and max out executive compensation packages, rather than investing it in productive activities. ................(more)

http://wolfstreet.com/2015/03/27/bond-market-liquidity-risk-central-bank-warnings/

[House of Roberts]

1. The perverse incentives of big corporations

is what is killing economies, including ours.

[Nuclear Unicorn]

2. The fact is, rates will eventually have to return to market control. That all but guarantees a snap

back to higher rates. That will have a horrid effect on the economy but the longer the Fed keeps rates artificially low the worse the damage will be. I think the bond-issuer are the smart ones.

[House of Roberts]

3. Therefore, the bonds buyers are the losers,

if the rate rises, because they should have waited for higher yields. The rate has stayed low because, once it starts to rise, lenders will have to hold their rates down, to compete for business, and risk more for less return. I expect the derivatives market will again over-leverage, trying to maintain profit, and Thom Hartmann's 'Crash of 2016' will become a reality.

[Nuclear Unicorn]

4. "the bonds buyers are the losers"

Pretty much.

lenders will have to hold their rates down, to compete for business, and risk more for less return.

That depends. If their lending portfolios are over leveraged and they're under-capitalized they SHOULD raise rates to reduce the incentive to borrow while pulling in more cash from interest payments and savings deposits.

Frankly, the practice of loaning money that hasn't been deposited should be outlawed. Loaning money and hoping economic activity grows to meet the currency supply has never worked because the money printers never stop printing money to allow for the economy to catch-up. If they did interest rates would snap upwards and that kills any expansion they expected to see. So they keep printing until currency inflation kicks in and then its a different sort of nightmare but a nightmare none the less.

I am so glad my husband and I drove a stake through my student loan last year. It's paid in full. We have 2 credit cards, we hardly use one but we make sure both are paid off each month. Our house is the only debt we have but it is valued at 80k - 100k more than we owe. Every thing else is a monthly expense. We avoid anything with an interest rate as if it were a plague.

[House of Roberts]

5. Re: Loaning money

The practice of loaning money and then selling the obligation should also be outlawed. What incentive is there to make responsible loans if one can then sell the (possibly worthless) paper?

Banking should go back to being the boring, green-eyeshade business it used to be.

I'm so under-indebted I can't get credit. My ex-wife had to finance her half of the house to me (per our divorce) because I don't have a credit record. It's working out, I've almost got the thing paid off, because of advances she's needed.

[Nuclear Unicorn]

7. "The practice of loaning money and then selling the obligation should also be outlawed."

Agreed.

Banking should go back to being the boring, green-eyeshade business it used to be.

Also agreed.

[dixiegrrrrl]

6. I think of it as financial hot potato game.

And that reference to blindfolds should also include ear plugs, because "bond bubble crash" has been a topic for a few months now.

[House of Roberts]

8. Wall Street has always been a 'hot potato game'.

The last 20 years or so, 401Ks have been the holders of most of the 'hot potatoes'. The big banks know which funds are going to buy what, and when.

Are we nearly neighbors? I'm in Huntsville.