From one bubble to another bubble? By Sober Look.
If you look at the chart from last week that shows outflows from high yield funds (see discussion), one thing that stands out is that loan funds are still seeing inflows. Part of the HY outflows actually ended up going to leveraged loans, as the recent uncertainty pushed investors to move higher in the capital structure. In fact loan funds AUM hit a new record in October.
Remember the High Yield market? What could possibly go wrong? From Sober Look.
High yield bond issuance hit an all-time record in 2012, with $306 billion worth of new HY bonds coming to market by the end of October. In fact September was an all-time record month for new issue – on the back of the Fed’s latest action.
Leverage finance space as a whole also hit a new record. Adding new issue HY bonds and institutional loans (see discussion) puts 2012 ahead of 2007, the previous record.
Good recap by Peter Tchir.
Too Early To Dream of a Fix, but Worth Reviewing what has happened
If “buy and hold” and the “carry trade” is the dumb money, it has done pretty well, even in Spain of all places. There have been opportunities to short Spain and make a lot of money, but it is worth pointing out how resilient it has been.
The best total returns for buying the Spanish 5 year were just over 13%, back in November of last year and this July. Had you bought at the peak of LTRO fever you are still down about 1%. I don’t do buy and hold, and was extremely bearish leading into LTRO, but it is a stark reminder that being short pits you against uneconomic buyers with deep pockets. I am now neutral at these levels, and will go into detail when I examine the risks of “Outright Monetary Transactions” or OMT.