Sunday, June 27, 2010

Corporate Default Expectations Rise, Emerging Market Spreads Widening

The bond markets are quicker-trigger to register concern about deteriorating fundamentals than the stock market, with risky credits the canaries in the coal mine.

Bloomberg reports that spreads have widened in both leveraged loans and emerging market debt, but also notes some analysts see this rise as a blip rather than a trend. From Bloomberg:

The percentage of corporate bonds considered in distress is at the highest in six months, a sign that debt investors expect the economy to slow and defaults to rise.

The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds climbed to 399 this month, or 16.7 percent of the total, the highest share since December, according to Bank of America Merrill Lynch index data…

The 2010 default rate in the U.S. may jump as high as 6 percent by year-end from 1.3 percent currently, according to analysts at Goldman Sachs Group Inc…

While Goldman Sachs forecasts defaults will climb this year, JPMorgan Chase & Co. analysts led by high-yield credit strategist Peter Acciavatti wrote June 25 that the rate will be 2 percent in 2010. The divergent views reflect uncertainty in credit markets as investors weigh the effects of Europe’s sovereign debt crisis and concern that the U.S. economy may tip back into recession…

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt is poised to widen the most this quarter since 1998, prices of leveraged loans are set to fall, emerging market debt spreads are headed for their first quarterly increase since the final three months of 2008 and asset-backed debt sales are slowing.

Topics: Credit markets, Economic fundamentals, Investment outlook

Email This Post Email This Post Posted by Yves Smith at 7:22 pm

15 Comments » Links to this post

15 Comments:

  • i on the ball patriot says:
    June 27, 2010 at 10:38 pm

    Here is a quicker trigger to register concern about deteriorating fundamentals …

    http://www.google.com/webhp?rls=ig#rls=ig&hl=en&source=hp&q=burgeoning+homeless&aq=f&aqi=&aql=&oq=&gs_rfai=CItigMQgoTMaRMZ20gASHv9SMCwAAAKoEBU_Q_vZ_&fp=e0fa4b5da4f245a4

    Deception is the strongest political force on the planet.

  • i on the ball patriot says:
    June 27, 2010 at 10:51 pm

    And we haven’t checked the homeless selling blood lately, another quick trigger, and demand is big in India, check the first story listed …

    http://www.google.com/webhp?rls=ig#rls=ig&hl=en&source=hp&q=homeless+selling+blood&aq=f&aqi=&aql=&oq=&gs_rfai=CxJ9TjwkoTOjtKIXyzAT16YHLCgAAAKoEBU_QA3Mh&fp=e0fa4b5da4f245a4

    Deception is the strongest political force on the planet.

    • Yves Smith says:
      June 28, 2010 at 1:35 am

      I try those Google links (as in copying and pasting into my browser address line) and I get only a Google search page (as in no search results)

      • i on the ball patriot says:
        June 28, 2010 at 7:54 am

        Yves, sorry for the link problems. I most always check them after posting and they both ‘hot linked’ from the comments box with no need to cut and paste. I use either Firefox or Safari browser, these were posted with Firefox. I googled “burgeoning homeless” for the top link and “homeless selling blood” for the second. I remember back when you first posted about unemployed selling blood to make ends meet and at that time I was hard pressed to find many examples. There are now many stories as well as many stories of homelessness.

        Contrary to Craazyman’s comment below that it has “always been like this”, I see a marked increase globally, and especially here in scamerica.

        Here is a specific link to the story referenced about selling blood in India;

        http://superflux.in/blog/?p=763

        The links were meant to add real life, real time, support to your post on the bond spreads. Sometimes we get so intent on the technicalities of hooking up the milking machine to the cow that we fail to notice the cow is dying or maybe even dead.

        Deception is the strongest political force on the planet.

    • craazyman says:
      June 28, 2010 at 5:49 am

      Look ball it’s always been like this. I remember, oh, maybe 7 or 8 years ago I read a story in the New Yorker (which I don’t read anymore, not out of principle, but just because I’ve read the same story over and over and over — the educated urban white man’s take on reality — and it doesn’t bore me or put me off but it’s just dust to me by now) about the shipbreaking industry in India. They haul old tankers there to be disassembled, haul them up on the flats of the beach and over the months they get taken apart piece by piecem, by hand by barefoot guys in cotton robes that wear out to tatters, and all the toxins from the plastics and the paint and the wires and the rubber and the guts of these things, it bleeds into the water and the air and through the skin of the shipbreakers. It’s the only industry there, the only job they have, and they live in hovels of metal cages with families and cook on open fires. And they get poisoned from the toxins that get released and die early and their kids have birth defects and they’ll kill you if you take their jobs or the dead ships away from them because it’s all they have. The other thing about the article were the photos, by Ed Burtynsky (sp?) a Canadian photographer (very well known) whose work on environmental disasters and landscapes I very much appreciate. Strange how the oily blue and purple toxic trail of ship ooze in the water and the red beach and the morning orange sky and the hulking shadows of these massive ships like dinosaurs, how it is all so beautiful in a photograph. Strange that way, how you need the dark to see the light. Not sure if there’s ever going to be an answer to that one. Until you’re face to face with the big Gorilla and you can ask first hand. But then, there’s no gaurantee you’ll even understand the answer. Even then. Something I think about, from time to time. This is why I don’t read the New Yorker anymore. I’d rather read Reggae lyrics and listen to the steel drums and drink a beer and smile while I can.

      • i on the ball patriot says:
        June 28, 2010 at 8:36 am

        Craazyman, see comment above, and … I don’t think it has always been like this. Yes, in the broad sense that humanity has always had a wealth owned and controlled spread (asset wealth), and a daily ration pecking order spread (income), things are the same.

        But I see those asset wealth and income spreads as markedly different today globally and far more pronounced here in scamerica with the overriding controlling factors being that the wall of resource consumption is now being hit, and the externalizations of humans are now far more powerful and are taking on a life of their own — it ain’t your Granny’s world anymore. Those days are gone forever …

        Your comment; “Strange that way, how you need the dark to see the light.”, is very fitting.

        It is the out of whack extremes that tell the story, and most, lost in their little manufactured boxes of shades of gray, don’t see those changes at all. If you pick your head up and look around you see a far different story than that being told in the wealthy elite corporate controlled media, people ARE selling blood to eat and stay alive, millions ARE homeless, and the air in the gulf smells of oil as tar balls wash up on the Gulf beaches and float like big corexit covered turds into the gulf stream and up towards the east coast and soon to Merry old England, home of BP.

        NO, it has not always been like this!

        Deception is the strongest political force on the planet.

  • gordon says:
    June 27, 2010 at 11:03 pm

    Ambrose Evans-Pritchard thinks the Federal Reserve is going to start buying financial assets again:

    http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html

    So what’s going to happen to the mountain of cash generated by a Federal Reserve buying spree? If Yves Smith’s post is right, it isn’t going to be used to buy corporate debt.

  • Frank Ohsen says:
    June 27, 2010 at 11:31 pm

    “The bond markets are quicker-trigger to register concern about deteriorating fundamentals than the stock market, with risky credits the canaries in the coal mine.”

    It is nothing new that big corporate defaults happen in a severe economic downturn. If it can happen to a GM sans bailout and a myriad of others sans TARP then how can one be surprised?

    What isn’t expected however is than an even bigger canary in the coal mine is the eighth largest economy in the world, California, which effectively defaulted last year issuing IOU’s and this year will likely do the same save a bailout.

    California is more than just another canary in the mine shaft.

    It’s the big fat yellow pterodactyl and it makes corporate defaults practically trivial in comparison.

  • Hugh says:
    June 28, 2010 at 12:47 am

    Cracks and fissures are showing up at an alarming rate. Stock market volatility in an aging bubble. Bond market spreads. The G-20 opting for deflation. The ongoing specter of sovereign default (Is Spain next?). The disaster of state and local budget cuts. Continued high unemployment. Political negligence to the point of criminality. Undercapitalized banks. An unreformed financial industry. The mortgage mess. Commercial real estate still out there. Friday’s job numbers report will come out going into a long weekend but unless they are very positive they will be yet one more crack in the splintering facade of recovery. The real question now is not if we will slide into recession and depression but when. Recent events would suggest it might be sooner rather than later but we are still in a period of flux and it is not clear what the precipitating event will be and when it will be. But the cards, as in house of cards, are in order and ready to go.

    • i on the ball patriot says:
      June 28, 2010 at 8:58 am

      What if the market and the gulf blow up at the same time?

      Hugh, your first line; “Cracks and fissures are showing up at an alarming rate.”, made me recall a recent read about the gulf, caveat emptor …

      Excerpt;

      ““Fissures or Cracks: According to geologists, the first signs that the methane may burst its way through the bottom of the ocean would be manifest via fissures or cracks appearing on the ocean floor near the path of least resistance, ie, the damaged well head. Evidence of fissures opening up on the seabed have been captured by the robotic midget submarines working to repair and contain the ruptured well. Smaller, independent plumes have also appeared outside the nearby radius of the bore hole. When reviewing video tapes of the live BP feeds, one can see in the tapes of mid-June that there is oil spewing up from visible fissions. Geologists are pointing to new fissures and cracks that are appearing on the ocean floor.

      Fault Areas: The stretching and compression of the earth’s crust causes minor cracking, called faults, and the bottom of the Gulf of Mexico has many such fault areas. Fault areas run along the Gulf of Mexico and well inland in Mexico, South and East Texas, Louisiana, Mississippi, Alabama and the extreme western Florida Panhandle. The close coupling of new fissures and cracks with natural fault areas could prove to be lethal.

      Bubble Eruption: A methane bubble this large – if able to escape from under the ocean floor through fissures, cracks and fault areas – is likely to cause a gas explosion. With the emerging evidence of fissures, the tacit fear now is this: the methane bubble may rupture the seabed and may then erupt with an explosion within the Gulf of Mexico waters. The bubble is likely to explode upwards propelled by more than 50,000 psi of pressure, bursting through the cracks and fissures of the sea floor, fracturing and rupturing miles of ocean bottom with a single extreme explosion.’

      More here …

      http://coyoteprime-runningcauseicantfly.blogspot.com/2010/06/gulf-oil-gusher-danger-of-tsunamis-from.html

      Deception is the strongest political force on the planet.

  • Hugh says:
    June 28, 2010 at 1:04 am

    Along the lines of my previous comment, I see that Krugman is also talking up a return to depression.

    http://www.nytimes.com/2010/06/28/opinion/28krugman.html?hp

    His reprise of recent events remains dodgy but this is nonetheless surprising coming from someone as Establishment as he is.

  • Frank Ohsen says:
    June 28, 2010 at 1:27 pm

    “If you pick your head up and look around you see a far different story than that being told in the wealthy elite corporate controlled media, people ARE selling blood to eat and stay alive, millions ARE homeless,……”

    Well certainly now Hawaii has issues developing into orders of magnitude. Three mile long tent city? Escape From Waikiki? Paradise lost indeed.

    http://www.staradvertiser.com/news/20100627_Huge_tent_city_takes_root.html

  • Parvaneh Ferhad says:
    June 28, 2010 at 2:52 pm

    Interesting. I thought there was a recovery going on – that shouldn’t happen if that were the case.
    The Maturity Wall is also approaching fast.

    http://wp.me/px1MN-fF

  • DB says:
    June 28, 2010 at 4:46 pm

    how can i buy an advertisement on nakedcapitalism? thanks.

  • David Kamran says:
    July 16, 2010 at 3:34 pm

    ‘i on the ball patriot” — your comments re fascinating … i.e. “deception for dominance” being cloaked by “complexity.” I’m an Investment Manager, and founded The Center for Freedom and Democracy (TheCFD). Send me an email: david.kamran@yahoo.com — -I’m always looknig for super-high intelligence (and rarely find it) … I’m also on Facebook, and WordPress: http://davidkamran.wordpress.com and http://thecfd.wordpress.com, but email is best of course … I really need to fnid out more … not sure if you’re in the Finance field – if you are – fyi – I’m currently working towards my PhD in Finance (while working) – and “may” be able to synthesize some of your ideas into my work – so, please send me an email when you have a moment … Cheers!!!/dK


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