Yesterday, I was asked about
statements I have made on numerous occasions that the recovery of the junk
bond market helps explain the rise in equity markets. Here is the specific
question:
Mish,
Can you explain why you frequently say that the corporate bond market
supports the equities market? I don't see why it would have the major effect
you seem to claim it does.
Let's go over the reasons
once again.
·
Companies
that cannot get financing go out of business.
·
In March
of 2009 many corporations poised to go under because they could not get
financing had exceptionally low stock market valuations. Even GE was on that
list. Those stocks rose many multiples after Bernanke managed to revive the
junk bond market.
·
When
companies issue long-term debt at lower and lower yields, their interest
expense drops.
·
The
entire atmosphere of chasing yields lower is a sign of increased speculation
across the board. One should expect stock prices to at least be firm in such
conditions.
Everything changed when Bernanke stabilized junk bonds. Interestingly,
Bloomberg discussed this situation today in Top Stories.
Maturity Wall Crumbles as $482 Billion of Debt Refinanced
The wall of bonds and loans
maturing through 2014 has crumbled by $482 billion, or 44 percent, since
2009, reducing the threat of defaults and allowing companies to bring riskier
deals to market. The amount of debt due in the next four years dropped to
$671 billion, from $1.2 trillion in 2009, according to JPMorgan Chase &
Co.
Some $163 billion of bonds and loans come due in 2011 and 2012, or about 60
percent of the refinancing activity in 2010. Clear Channel Communications
Inc. said it plans to sell $750 million of bonds to repay $500 million of
short-term loans.
Stronger economic growth and the Federal Reserve´s decision to keep
benchmark interest rates at almost zero, while pumping $600 billion into the
financial system by purchasing Treasuries, have driven down yields and
spurred demand for low-rated debt. That´s allowed companies to seek new
borrowings with fewer provisions that protect investors.
"The wall of worry has been greatly reduced," said Sabur Moini, the
high-yield money manager at Los Angeles-based Payden & Rygel, who
oversees about $2 billion of speculative-grade debt. "You've had a big
rally for the last two years and that's allowed companies and underwriters to
be more aggressive."
How
much better can things get, especially with treasury yields soaring?
I believe junk bonds are priced for perfection and equities priced well
beyond perfection.
Please see Negative
Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far
More Likely Than You Think for details.
As I have said many times, when this all matters is anyone's guess.
Mish
GlobalEconomicAnalysis.blogspot.com
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