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Bernard Thomas

 
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  • Junk Bond Bubble Cracks, Destroys Stocks One At A Time [View article]
    Bravo. I have written very similar sentiments in my Bond Squad reports. In today's report I wrote:

    The marketing spiel which stated that high-risk assets are performing well because of Fed policy and will continue rising when the economy pick up displays a clear misunderstanding of the risk asset markets.
    Sep 30, 2014. 02:32 PM | Likes Like |Link to Comment
  • When Will Interest Rates Rise And What Will Cause Them To Rise? [View article]
    There are no upward pressures on rates. Thanks to disnflation/deflation overseas and the strong dollar pushing down energy prices, headline inflation could trend lower in the U.S.

    Banks have much excess reserves, but it really isn't excess when you consider that capital requirements keep rising and banks are very selective when lending so as not to gave the GSEs put mortgages back to the bank.

    The demand for credit is poor, but much of this is longer-term and structural in nature. Investors and market participants waiting for lending to pick up might as well join Linus in waiting for the great pumpkin.

    The economy you see is the economy you get until fiscal polices become more pro-growth, both here and abroad. Demographics and tastes have changed. So must fiscal policies.
    Sep 24, 2014. 05:46 PM | 2 Likes Like |Link to Comment
  • The Fixed Income Landscape: What A Difference A Year Makes [View article]
    What most economists and investors did not foresee was global disinflation and a U.S. economy that, while a little bit better, is still just cruising along. We at b
    Bond Squad (http://bit.ly/1nmyCGq) also believed the 10-year would end the year in the mid-3.00% area, we had a sneaking suspicion that we could see rates dip into the 2s before marching higher. Now te economy looks a little softer and Fed policy has become less inflationary while economic growth has settled in to a nice, but not robust pace. Demographics and a very slack global labor market (one which has not shot at becoming right enough to generate significant wage pressures in the foreseeable future) threaten (promise) to keep rates low. The 10-year could peak in the mid 3s in the next rising cycle. The Fed Funds Rate might not get beyond 3.00% as growth and inflation might not be strong enough to push the Fed to act aggressively and the Fed has other tools (repos, deposit rate) with which it can tighten.

    My fear is with risk assets, even a modest rise in short-term rates without stronger revenue growth could kill junk debt, even the much-loved floating rate loans.

    The Great Asset Allocation Renormalization is under way. The demand for quality income-producing instruments with predictable cash flows and stated maturities will continue to increase during the next decade.
    May 20, 2014. 10:14 PM | 3 Likes Like |Link to Comment
  • New Alarm On Shadow Loans [View article]
    The reason why we should care is that retail investors are buying "senior bank loans" which are senior obligations of shaky companies and not issued by banks using questionable lending standards and weak covenants. Many investors thing they are buying high-quality investments and are unaware that the loans can be rated B, CCC or not rated at all.
    Oct 15, 2013. 03:38 PM | Likes Like |Link to Comment
  • Bank Loan ETFs Offer 4% Yields, Protection From Rising Rates [View article]
    Senior bank loans are not as "fool-proof" as wholesalers portend (pretend). They are senior claims on risky credits. They might be safer than CCC-rated bonds, but they are in now way a conservative or moderate risk investment. As more and more loans are cov-lite, the corporate borrower is able to "behave badly" with little recourse from borrowers.

    The "interest-protection" aspect is unneeded insurance at this time. Why? Bank loans usually float off of Libor, usually three-month Libor. Except in times of crisis, three month Libor move with Fed Funds rates. What investors are probably looking at is three more years with no coupon increase. When coupons do rise, they will do so gradually and modestly. If rates rise more rapidly, businesses might find that they are unable to pay the higher interest rate and/or they can no longer obtain affordable financing as attractive returns are now available in higher-quality investments. This would be especially true if the yield curve steepened. At that point, risky corporate borrowers find find it beneficial to restructure its debt while giving investors less than 100 cents on the dollar. Investors should not assume that they will receive rising income streams or even 100 cents on the dollar at maturity. Bank loans are speculative investments, period.
    Feb 28, 2013. 09:20 AM | Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    I like 5 to ten year bank bonds. Spreads are wider enough that there should be some more spraad compression as rates rise compression, which should offset some of the rate rise.
    Aug 25, 2012. 08:07 PM | Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    Correct!!! This is how play HY. Use common sense, don't extend out too far and stay in HY, not junk. There is a difference.
    Aug 6, 2012. 10:53 AM | 2 Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    Back to 2008. Yeah that is a long time. 2009 to now has been the golden age for HY! Remember the junk bond scandals of the late 80s / early 90s when companies defaulted left and right. Please, have a little deeper perspective. I have been in the bond market for more than two decades.

    Why don't we just use default rate data for mortages during the housing bubble (when they were at all-time lows) and use that as the norm too. Hence BUBBLE!
    Aug 6, 2012. 10:52 AM | 2 Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    Hmm, for a company to call a pfd, it usually needs to save at least .75 on the coupon (cost of financing) to cover costs of coming to market and realizing a meaningful savings. Do you really think that preferreds which have been issued in the current low-rate environment will ever be able to be called?

    This is why I say my grandchildren will be trading some of these 50-year or perpetual preferreds. Preferreds are negatively convexed and call features are designed always benefit the issuer. It gives them the right to call when they can refinance at lower rates, but they can leave them out there when rates rise and enjoy realtively cheap financing.

    10-year BBB and A-rated bonds give you better returns when duration and seniority are considered. Preferreds are long-term securities which are called when beneficial for the issuer, as as been the case for the past 30 years.

    How will the investor feel holding a 5.75% pfd valued at $19 when new preferreds are being issued at 8.00% and 10-year corporatre seniro debt is being issued at 6.50%?
    Aug 6, 2012. 10:47 AM | 2 Likes Like |Link to Comment
  • Bubbles And Squeak - Why Danger Lurks In High Yield And Preferred Securities [View article]
    The situation is this. There is much money in HY that would not be there if rates were normal and attractive yields could be had in investment grade bonds. There is also money in HY from equities. When the economy and rates "normalize, capital shoudl return to their traditional homes. Many curent BBB-rated invetsors wil move to A. Some BB investors will move to BBB, B to BB and CCC to B. Itis at the very bottom of the scale where the pain will be concentrated.

    HY bonds do behave more like stocks, but they are financing sources for corporate issuers with weak credits. They are subject to inetrest rates. If the 10-year Treasury is at 4.00% and A-rated indutrials are at 5.00%, BBB-rated at 5.50%, BB ratd at 6.00%, B-rated at 8.50% then CCC might be at 10.00% or more. Some companies may be un willing to refinance at 10.00% and could defualt or restructure debt at less than par.

    HY has done well because of low rates. There could be an equal and opposite reaction when the rate situation reverses. HY fund wholesalers and marketers (most of whom do not understand HY bonds and are simply regurgitating what they have been told) are painting a scenario that HY bonds do well when the economy is bad and even better when it is good. If that was the case, they would not be very risky, would they.

    HY isusers especially low B, CCC and lower, are very sensitive to financing costs. Many would have already defualted if not for the current rate environment. Wholesalers love HY. Traders are concerned that this is the golden age and it will come to an end within five years. If you are playing with HY, stay five-years (maybe three-years) and less.

    If you would like, I can send you a free trial sucbcription to my service "Bond Squad." We don't ask for credit card info for free trials, it is truly free and with no obligation whatsoever.
    Aug 6, 2012. 10:42 AM | 2 Likes Like |Link to Comment
  • Right Said Fed: Why Bernanke Was Right [View article]
    Higher rates might force elected officials to act, but if they did not the results could be catastrophic for the economy. Put yourself in Bernanke's shoes. He has the economy barely breathing on its own. He has fiscal headwinds from a dysfunctional budget deficit coming next year (not to mention slower global growth. He has a Congress which can't agree on the color of the sky, never mind fiscal policy. Hew will keep policy accommodative, but not necessarily unchaged, until the boys and girls on Capitol Hill can work together on a solution.
    Mar 29, 2012. 08:21 AM | 1 Like Like |Link to Comment
  • Lack Of Jobs Creates Tough Decisions For Policymakers [View article]
    muoio; ever hear of comparative advnatage?

    Tariffs and protectionism are counter productive in the long run. We cannot become economic Luddites. Speaking if Luddites, reversing the trend of increased automation and efficiency will not work either.

    Why will no one admit that for 20 years we lived an unsustainable lifestyle in the U.S. and we need wages and asset prices to reset to be globally competitive?
    Sep 5, 2011. 08:53 AM | 2 Likes Like |Link to Comment
  • Lack Of Jobs Creates Tough Decisions For Policymakers [View article]
    Strat, not all companies can take advantage of all breaks. Lower the tax rate and eliminate loopholes and everyone benefits. Same goes for personal income tax. Flat tax is best.
    Sep 5, 2011. 08:45 AM | 2 Likes Like |Link to Comment
  • Lack Of Jobs Creates Tough Decisions For Policymakers [View article]
    Dialectual, I am not paid for these articles.
    Sep 5, 2011. 08:43 AM | Likes Like |Link to Comment
  • Laddering Bond Portfolios: The Alternative to Bursting Bubbles [View article]
    Problem with bond funds is that they don't necessarily work for income investors. Bonds are bought and sold leading to unintended consequences for income-oriented investors.

    ETFs permit equity-like speculation in the fixed income markets. Not good for income-oriented investors.
    Jan 24, 2011. 09:31 PM | Likes Like |Link to Comment
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