Friday, October 17, 2014

This is Really the Next Big Bubble: Risky Bond BetsThat Major Bond Funds Will Never Be Able to Liquidate in a Crisis

It is my view that we have likely already started a multi-decade decline in the bond market. It has a long, long way to go. As the decline intensifies over time, it will be the sub-prime market that will experience the greatest shocks, just like the sub-prime real estate market was the most badly damaged when the real estate bubble burst.

When the real estate bubble was still floating, there was so much money around that a lot found its way into the real estate sub-prime sector. The same thing is now occurring in the bond sector.

NYT reports:
Regulators and bank executives have cautioned that an accumulation of hard-to-trade, risky bonds by a small group of fund companies could turn a bond market hiccup into a broader rout, in light of how illiquid many of these securities have become.



Junk Bond Investors

Pimco is one of the largest managers of high-yield, or junk, bonds. But recent jitters in financial markets have raised concern about these types of investments, which can be risky and difficult to trade.


Asset manager’s stake of the
company’s high-yield debt
Asset manager
Debt issuer
1.
Pimco
Ally Financial
37.3
%
2.
Pimco
SLM
29.9
3.
Pimco
A.I.G.
26.4
4.
Franklin Templeton
First Data Corp
25.5
5.
Franklin Templeton
Tenet Healthcare
23.4
6.
Franklin Templeton
Caesars
18.3
7.
Pimco
CIT Group
18.0
8.
Franklin Templeton
Charter
13.5
9.
Franklin Templeton
Sprint
12.6
10.
Franklin Templeton
Chesapeake Energy
11.8
11.
Franklin Templeton
Reynolds Group
11.6
12.
Franklin Templeton
Community Health Systems
11.2
13.
Pimco
HCA
11.1
14.
JPMorgan Chase
Dish Network
10.1
15.
Pimco
MGM
9.7

In my view, this is no time to be anywhere in the bond market, but you have to be particularly insane to be holding subprime ("junk") bonds.

2 comments:

  1. There was a bubble in a 87, then a crash. The Fed then printed money, and the bubble grew again.

    There was a bubble at the end of the 20th century, then a crash. The Fed then printed money and the bubble grew again

    There was a bubble in 2008, then a crash. The Fed came in and printed money and the bubble grew again.

    There is a bubble in 2014, and there might soon be a crash.

    Why cant the Fed do what is has always done, print money and grow the bubble again?

    Now, economics shows there are no free lunches. And yet, major wall street firms make money on the way up and if and when the bubble bursts, they get bailed out by the fed directly with cash or 0% rates or their assets rise again when a new bubble is blown again. It would appear that is a free lunch, no?

    In short, in what situation will the Fed ever be prevented from blowing another bubble? We all know boom bust, boom - wash repeat. Whats going to change that?

    After this next bust, why would it be unthinkable that the S&P doesn't go to 3,000 or that the average house in the Bay Area would cost 1 million dollars? The boom seems to always return.

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  2. First by inflation then by deflation. That's how the bankers come to own everything. It's why most early Americans were against fiat money and central banking. The pattern won't stop until these two systems are ended.

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