- BofA Issues Dramatic Junk Bond Meltdown Warning: This “Train Wreck Is Accelerating”
by Tyler Durden, www.zerohedge.com
On Tuesday, Carl Icahn reiterated his feelings about the interplay between low interest rates, HY credit, and ETFs. The self-feeding dynamic that Icahn described earlier this year and outlined again today in a new video entitled “Danger Ahead” is something we’ve spent an extraordinary amount of time delineating over the last nine or so months. …
Of course this all comes at the expense of corporate balance sheets and because wide open capital markets have helped otherwise insolvent companies (such as US drillers) remain in business where they might normally have failed, what you have is a legion of heavily indebted HY zombie companies, lumbering around on the back of cheap credit, easy money, and naive equity investors who snap up secondaries.
This is a veritable road to hell and it’s not clear that it’s paved with good intentions as Wall Street is no doubt acutely aware of the disaster scenario they’ve set up and indeed, they’re also acutely aware of the fact that when everyone wants out, the door to the proverbial crowded theatre will be far too small because after all, that door is represented by the Street’s own shrinking dealer inventories. Perhaps the best way to visualize all of this is to have a look at the following two charts:
For their part, BofAML is out with a new note describing HY as a “slow moving trainwreck that seems to be accelerating.”
Here’s our short take: US high grade and high yield markets have suffered under the weight of weak commodity prices, heightened issuance (and the forward calendar), the rally in the long bond, rising idiosyncratic risks and illiquidity limiting the recycling of risk. Lower commodity prices are increasingly pressuring metals/mining and energy firms because prices are so low that many business models are essentially broken.