At a breath-taking pace. Default rate spikes. US stocks at record.
Standard and Poor's default rate of US high-yield corporate bonds -the more appealing moniker for junk bonds - jumped to 4.5% in July, the worst since August 2010.
But no problem. The S&P Distressed High-Yield Corporate Bond Index - comprised of 470 bond issues so troubled that they're trading at a yield that is at least 10 percentage points higher than the Treasury yield - has rallied 48% since February 12.
This includes the 2.5% swoon on Friday, when some of the hot air was let out.
Default rates blowing out to crisis proportions while institutional investors are piling into distressed junk bonds and drive up prices despite soaring defaults - these are the kinds of out-of-sync movements that our era of interest rate repression, QE and the relentless search for yield is becoming famous for.
And so, in the same out-of-sync manner, despite rising junk bond prices and falling yields, US high-yield bond issuance in July dropped 32% from June, to $14.9 billion, according to LCD of S&P Global Market Intelligence. For the first seven months of the year, total issuance plunged to $196 billion, down 32% from a year ago.
In Europe, it's even worse. According to LCD, high-yield issuance this year through July plunged nearly 50% year-over-year, to just €27.5 billion.
And here's the conundrum in Europe: Corporate borrowing costs have dropped to a record low, repressed by the ECB's negative interest rates and QE under which it scoops up not only government bonds, asset-backed securities, covered bonds, and as a German politician fretted so wisely years ago, old bicycles, but also corporate bonds. So by Friday, the average yield of investment-grade euro-denominated corporate bonds has dropped to an all-time low of 0.7%.
According to Bloomberg, about 26% of the 489 corporate bonds the ECB has mopped up so far have negative yields: Free money for corporations, financial repression for investors.
Since the ECB started this in early June, it has bought €13 billion of corporate bonds. During the same period, companies issued only €19 billion of bonds. The ECB is also buying large quantities of government bonds and other assets from investors who then take this money and chase after the shrinking pile of the remaining securities.
But the ECB isn't yet buying junk bonds, though surely, in addition to old bicycles, it will soon do so in its utter and rising desperation. But junk bond yields too have dropped in recent months and yet issuance is drying up.
We know where a small part of this comes from: European energy bonds. They're collapsing, investors are getting worried, and companies are having trouble issuing new bonds.
For example, in the second quarter, the trailing twelve-month Nordic high yield default rate jumped to 12.4%, the highest since the second quarter 2010, up from 9.7% in Q1, driven by 19 default events (including 12 distressed debt exchanges). Much of the activity happened in the oil and gas sector: In June, the Norwegian Oil & Gas default rate soared to a record 34.8%, higher even than during the Financial Crisis.
In the US and the EU, oil & gas companies - except for the largest among them - are having trouble issuing bonds. But they had trouble last year too, and issuance had already plummeted in 2015 from a year earlier. So it doesn't fully explain the collapse of junk bond issuance on both sides of the Atlantic.
Particularly interesting, and a warning sign: US stock markets are at record highs even while junk bond issuance has been grinding down this year, from an already lousy 2015, another one of those out-of-sync movements that are becoming symptomatic for our era of incessant market manipulations by central banks and their zero- and negative-interest-rate policies, QE and financial repression.
So now, bond bull Grundlach makes U-turn and goes "maximum negative" on Treasuries - and just about everything else. Read… "Stock Markets Should be Down Massively," but Investors "Hypnotized that Nothing Can Go Wrong"