Tuesday, January 8, 2019

The Guy Who Shorted Mortgage Backed Securities Before the 2008 Crash is Now Warning About Low-Rated Corporate Debt

The Finacial Times reports:
Steve Eisman shot to fame after Michael Lewis’s book The Big Short, which homed in on his profitable bets on the US housing market collapse which tipped the world into recession. Now the New York fund manager is eyeing another menace to the financial system: corporate bonds hovering just above a junk rating.
The market for triple B-rated bonds — the lowest rung of investment grade — has exploded in size since the financial crisis. Outstanding BBB-rated issuance has grown from $750bn at the end of 2007 to about $2.7tn now, as debt-laden companies have been kept alive by low interest rates and a generally improving economy.
But size is not the problem, says Mr Eisman, who is now a portfolio manager at Neuberger Berman, an investment group based on Sixth Avenue which was spun out of Lehman Brothers a decade ago. Rather, he says, it is that big banks have cut their trading inventories of BBB bonds by about 80 per cent, to $20bn, as they try to comply with tougher rules on capital and liquidity. With the traditional market-makers on the sidelines in the next recession, Mr Eisman says, the only way to sell BBBs will be at painfully deep discounts — forcing big marked-to-market losses on funds holding them.
If a recession hits, Eisman is going to be correct on this and the odds of a recession later this year are very high. I am telling EPJ Daily Alert readers that I will probably see enough negative key data by the end of February to make an official recession call.


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