Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Wednesday, April 20, 2011

Why is there a massive institutional/corporate credit boom underway?

Unemployment is high, much too high. Housing is so poor, with so many homes hidden in the foreclosure pipeline that the true nature of the massive supply that must be worked through for even stability to occur is drastically understated, causing even the faintest phantom of a month-over-month uptick in either new or existing home sales to be greeted with heaving sighs of relief... 

While I could go through the massive amounts of bond issuance that have occurred since 2009, the signposts along the way, such as the July 2010 GM purchase of Americredit for $3.5 billion, the chart below is enough to put at least a picture on the appetite for risk being seen behind the scenes in credit markets. It shows the FINRA - Bloomberg Active High-Yield US Corporate Bond Index Average Yield-to-Maturity. Incredibly, after the spike in 2008 and into 2009 when these bonds almost literally could not be given away, yields are now back down to May 2007 levels...

Anyway, here's the question for us to consider: Why is there a massive credit boom underway?...

Bloomberg Headline: 21% Return Needed

Huh. Well, that's certainly optimistic. Who needs a 21% return? The Teacher Retirement System of Texas. By year-end August 31. Why in the hell does the Teacher Retirement System of Texas need a 21% return by the end of August? Because if they earn less then their pension liabilities will fall below the 80% covered ratio that actuaries consider adequate. According to Bloomberg, the pension fund's return in 2010 was 14.7%, the best among large public pension funds. Adding to the performance pressure, the Texas legislature is considering reducing the state's contribution to the fund, which is now 6.64% of employees' salaries the Bloomberg article notes.

So this is who is buying credit. Pension funds, endowments, large institutions, all of whom are desperate to make up performance lost during the last credit bust. This is herding behavior at its finest, which doesn't make it dumb, just natural. All investors and traders, in both stocks and credit and commodities, herd; a separate consideration, but an important point. Herding produces booms and, inevitably, busts.
---Kevin DePew, Minyanville, today

Bill:  Also - low interest rates.  If you want cheap $, you can get 'em.  Who doesn't want cheap $?

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