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Subject:  The next bubble Date:  4/2/2013  4:19 PM
Author:  SuisseBear Number:  419533 of 567348

... following the pre-2008 high yield (sub prime) bubble is ...

<drum roll>

... a high-yield (corporate) bubble - so says the Telegraph:

Sales of high-yield debt – or, as they were once known, junk bonds – have exploded this year. In January alone, non-investment grade Asian companies, those whose debt is ranked by credit rating agencies as riskiest, sold just over $9bn (£6bn) of high-yield bonds, a year-on-year increase of more 6,000pc, according to figures from data provider Dealogic. In Europe, sales of high-yield debt is also running at record levels and nearly $30bn of bonds have been sold so far this year. ... In large part, the explosion in demand for high-yield debt has been a direct consequence of the response of Western governments to the last crisis. Since Lehman’s collapse, some $12 trillion has been pumped into the global financial system by central banks across the world in an effort to prop up banks and maintain low interest rates.


“What you’ve basically seen is people who don’t really want to take more risk being forced up the risk curve to get the yield they need,” says one London-based bond trader. ... S&P noted with alarm that despite its risk models showing that the probability of high-yield companies defaulting had nearly doubled in the past 12 months to a one-in-three chance, the yield on the bonds had halved over the same period as money continued to flood in. ... Several bankers and investors said the provision of leverage was now common in Asia, where clients of private banks will routinely demand to be lent money to win their custom amid a dog-fight among local and international banks to win a share of the region’s increasingly wealthy private investor base. Experienced traders regard many of these newcomers as “dumb money” and point to the enthusiasm with which the clientele of Asian private banks have bought highly-risky bail-in bonds from European banks.

The most notorious case of this was the sale by Barclays in November of a 10-year $3bn CoCo, or contingent convertible bond, which attracted enough orders to sell the debt more than five times over. That was despite the inclusion of a clause that meant that should the bank’s capital levels fall below a predetermined level the entirety of the investment would be wiped out. ... “By losing all value prior to existing credit and equity investors, this bond is essentially providing insurance to every other investor. In short, investing in these bonds is like being in a reverse lottery where someone gives you one pound every week and then suddenly turns up demanding millions,” said Ms Johnson. ... “The Asians will buy anything that carries an 8pc coupon because they think it’s lucky,” says one senior portfolio manager.
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