Home with flu last two days, so bloomberg tv is on in the background. Talking heads gave the following info. Evedently GS put out a report saying 2010 should be great for corporates due to credit tightening. (that sure suprises me) Also showed that 2009 offerrings were high, $1.04 trillion, highest in past 5 years or so. No, I did not search for the report.
What is scary to me is that most corporate bonds traded much lower than current levels in 2006 through 2008. Yes, it was a rising rate environment, but historically speaking it was still a low rate environment. What's happening now with bonds is surely a bubble, caused specifically by a historically low interest rate environment. Everyone is piling into an increasingly crowded bus and hoping that these conditions persist for many years. It seems to me that high-yield, and particularly long-dated high-yield, will quickly lose 10 to 15% of their principal value as soon as rates start up. It looks like a game of musical chairs and everyone assumes they will not lose a seat in the near future.The alternative is to go for short-duration A credits, in which case you make trinkets (typically 1% to 3%). It's fine for someone who is ultra-rich and wants to preserve capital, but it's not viable for someone who needs to make their money work.For my own case, I'm increasingly more attracted to distressed debt simply because I can measure risk and reward and compare them. With high-yield long-duration debt trading near its top, the risks are mostly hidden and the rewards are not great.
It seems to me that high-yield, and particularly long-dated high-yield, will quickly lose 10 to 15% of their principal value as soon as rates start up. It looks like a game of musical chairs and everyone assumes they will not lose a seat in the near future. But barring default, if one bought bonds at good prices for the long term, this "bubble" bursting doesn't affect your bottom line. Coupons keep coming and principal gets paid back (Again, barring default).And in fact, the bubble bursting will simply provide more buying oppurtunities for you to reinvest your coupons and returned principal in.Scott
I made my comment in reference to high-yield, long-duration bonds. That means junk. Junk means high default rates. Specifically:- A B rating by Moodys means a 6.53% chance of default within one year of getting that rating, based on data from 1970 to 2001.- A C-to-Caa rating by Moodys means a 24.73% chance of default within one year of getting that rating, based on same data. So my point was that people invested in junk credits could be hit with 15% capital losses quickly when rates rise. They are then trapped between a short term capital loss and a high probability of default.Your point would be absolutely clear for me if we were talking about A credits, where the chance of default is less than 1/2 of 1%.Junk credits were a buy of a lifetime in March. Today they look to me like a value trap. There is more risk than reward there for many of them.
Your point would be absolutely clear for me if we were talking about A credits, where the chance of default is less than 1/2 of 1%.Junk credits were a buy of a lifetime in March. Today they look to me like a value trap. There is more risk than reward there for many of them. To me the term bubble implies a phenomenon different than the occurrence of defaults. When I buy fixed income, the assumption always includes holding to maturity, short term capital loss would not be a factor to me. Default is, but I make my purchases to take into account default risk.My concern with buying issues today vs. 9 months back is two fold:a. We very well may retest the lows of last Marchb. Inflation will eventually rear it's ugly head. The reduced YTMs we see today provide less of a factor of safety when I factor in the potential short term inflation spike that is coming.It is much tougher for me to find attractive oppurtunities today in relation to 9 months ago, but I'm fairly fully invested due to those same oppurtunities. My main focus these days is gaming a few equity/option positions and taking cash off the the table when it's prudent.Scott
Your point would be absolutely clear for me if we were talking about A credits, where the chance of default is less than 1/2 of 1%.This is a gratuitous note to all. Ignore it as you choose. The individual --whomever he or she might be -- who made the above assertion has no idea what he/she is talking about, as even the briefest effort to discover the facts will prove.Single-A's show a much higher default-rate than 1/2 of 1%. For the time frame of 1920 to 1999, the five-year cumulative default for single-A is over 2%. The ten-year rate is about 4%. The fifteen-year rate is tagging 7%. The twenty-year rate is even higher. The source of my information? The same sources that you have access to if you go looking, plus a lot of market experience. 1/2 of 1%? Not likely.
OK - YOU TWO KNOCK IT OFF!I may be speaking out of turn - oh wait that is my MO...The reference to:where the chance of default is less than 1/2 of 1%Was for a Probability of Default for the 1 year period after obtaining that rating assignment by one of the now famous rating agencies. Which by some freaky thing we call math, ends up with about a:five-year cumulative default for single-A is over 2%I read these two statements as pretty close to the same thing. Now as the title says - somebody (who shall remain nameless) is bullish on corporates in 2010, perhaps we can discuss if fundamentally we agree with why??d(GS)/dT
Now as the title says - somebody (who shall remain nameless) is bullish on corporates in 2010, perhaps we can discuss if fundamentally we agree with why??Sure, Goldman Sacks --this time I got the spelling right-- is "talking their book". A recent issue of BusinessWeek --or maybe it was The Economist-- chronicles how much money has gone into the debt markets, instead of the equity markets, this year. GS knows most investors are stupid sheep that will follow performance. So they're planning to sheer and slaughter the sheep. 2010 will be another fabulous year for GS.Well, maybe it will be, and maybe it won't. But I think that kind of macro-economic guessing/market-strategizing is a waste of time. No matter the market, I'll be shopping weekly. If I find value, I'll be buying. If I don't, I'll go fishing and wait 'em out. No one knows will 2010 will bring for any asset class, not GS, not anybody.
Sure it will be a good year for GS; they make money on assets under management regardless of performance, the blow up drove more money to them. As brokers they make money on trades, direction is irrelevant. As for their coveted proprietary trading platform we all now know it is as vulnerable to fat tails as everyone else'. IMHO on a macro scale, within automated trading systems, the only way to garner outsized profits is to take on proportional risk or cheat. Now there are several ways to cheat, in the past GS somehow managed to lay off a significant portion of its risk using various "hedge" strategies purchased from AIG and others at price exceedingly favorable to GS. I don't know what you folks have been reading, seeing or hearing but I have not seen any systemic changes that restricts GS' ability to resume said strategy. jack
As the saying goes "There are lies, damn lies, and statistics." What we have here is a case where we all actually agree on facts, but in order to grandstand one of us is manipulating statistics, and isn't me.First, I said "A credits" which is inclusive of the entire family AAA AA and A. You converted that to the singular "A-Credit" which already is going to distort the statistic significantly.Second, can we please look at the big picture here? schurchill16 was making the point that we shouldn't feel the effect of a short term implied capital loss as long as we carry the debt to maturity. I was simply making the point that for *any* kind of A credit I understand and agree with his point. What do we care if the default rate is 1/2 of 1% or 2%? For purposes of the bigger picture point involved, it's all the same.Third, I was referring to default rates *for the next 12 months*. You are referring to default rates for extended periods.I don't question your experience. I would however ask that you stop taking cheap shots.
To everyone who looks - The price paid for those hedges seems exceeedingly favorable in hind sight. And as you mention "fat tails" you know why those hedges were purchased and the price was exceeding favorable looking forward. But the price paid was available to many counterparties, GS is not the only one to price them! And it was the way AIG was pricing them that was impetus for GS to go and buy more protection. You could safely bet GS will continue to hedge. IS that cheating? We can hedge our portfolio.Assets Under Management will probably grow this year. And there is a fee involved with that. If you are provided a service then you should pay a fee. I am not going to argue whether or not the fee is earned, justified, just point out that those who put their assets under management feel it is, and so they pay.The coveted prop trading??? Whether or not that paid off quit nicely during the fat tail events of late well, seems it is still up and running
I don't fault GS for covering their risks nor for doing it as cheaply as possible. I do believe they used both their weight and their good ole boy network ties to negotiate their prices. Again, I don't fault them for doing so and I don't think some of the other houses were able to negotiate similar prices. Honestly, I'm really not sure what AIG was doing or if they even had a clue what they were covering. Greenberg can insist all he wants that the disaster wouldn't have happened under his watch yet he presided over the first AIG market fart.Anyhoo, like it or not GS makes piles of money and manages to cover themselves.jack
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