Bonds Markets Pricing In Armageddon
Kurt Brouwer October 20th, 2008
‘Armageddon Prices Fail To Lure Buyers Amid Selling (Bloomberg, October 17, 2008, Pierre Paulden and Caroline Salas)
Credit markets have fallen so far that they are providing a “once in a lifetime opportunity,” and investors are still selling.
Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor’s. Yields on corporate bonds show investors expect 5.6 percent of the market to go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.
While central banks injected $3 trillion into the global economy, credit markets are tumbling because banks are clamping down on lending, forcing investors to unload assets they bought with borrowed money. The Federal Reserve said Aug. 11 that its quarterly survey shows most “domestic institutions reported having tightened their lending standards and terms.”
“There has been widespread liquidation of assets that has nothing to do with fundamentals,” said Scott D’Orsi, a partner at Boston-based Feingold O’Keeffe Capital, a hedge fund which has $1.3 billion in assets. “Investors in bank debt are being presented with a vast number of extraordinary opportunities; opportunities that I would characterize as once in a lifetime.”
The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG…
Most of the gloom in the financial markets has focused on either real estate or stocks, both of which have fallen sharply this year. But, the bond markets have suffered considerably as well. Other than U.S. Treasury securities, pretty much all bonds and other fixed income securities are under severe selling pressure right now. This decline in real estate, stocks and bonds is one very important reason why this downturn feels so much worse than many previous downturns.
- Economy , Geopolitics , Hedge Funds , Investing , Mutual Funds , Personal Finance
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