The year in credit

The year in credit

Credit markets, I wrote a lot about them this year. One day some other asset class will grab my attention but for the time being it’s this. Sorry.

Here’s what I wrote about the market in 2015 – or at least, since starting the new gig over at Bloomberg in April. I may have missed a few here and there (and included some fixed income posts that I think are related to over-arching credit themes), but I think this is pretty much covers it.

Happy holidays, and may 2016 be filled with just the right amount of yield.


Another Sign That the Subprime Auto Market Is Getting Hot – My first post at Bloomberg was suitably about investors reaching ever further for yield – this time waaaay into the subprime asset-backed securities (ABS) market. Skopos Financial, a four-year-old auto finance company based in Irving, Texas, sold a $149 million bond deal consisting of car loans made to borrowers considered so subprime you might call them sub-subprime.

Wall Street Is Thinking About Creating Derivatives on Peer-to-Peer Loans – Just read it.


Fed Research Paper: Everyone Wants Corporate Bonds, and That Could Hurt the Economy – A Federal Reserve working paper attempts to quantify the effects of credit-market sentiment on business cycles and finds a link between compressed credit spreads and a slowdown in the economy. “The question our research raises is whether there is a future price to be paid for today’s highly accommodative policy,” the authors say.

German-Bond Investors Just Lost 25 Years of Yield in 14 Days – The dramatic sell-off in German bonds in late April and early May gave investors a crash course in duration risk and its relation to bond prices and yields. (See also this later post for a short-ish explainer on duration.)

Why Would Anyone Want to Restart the Credit Default Swaps Market? – Poor credit default swaps. As in repo market, the market for single-name CDS has been vilified and hard-hit by post-financial crisis regulation, but some Wall Street players are mounting an effort to revive it.

Citi: This Is Why Wall Street Is Hard-Wired to Produce Bubbles – As good a definition of a market bubble as any. Citi analysts led by Robert Buckland say: “A weary client once defined a bubble to us: “something I get fired for not owning. It is career-threatening for an asset manager to fight a big bubble. For example, the late 1990s [technology, media and communications] bubble almost destroyed the value-based fund management community. Any bond manager hoping that valuations were mean-reverting would have been fired many years ago.”

The Simple Reason Why Everyone Wants New Corporate Bonds – See above. This story also touches on the tyranny of benchmarks and the pressures asset managers face in beating them. Because of technical quirks in the corporate bond market and its benchmark indices, newly-issued debt is almost guaranteed to produce the precious outperformance known as alpha.

There’s a Lot Going On Below the Surface of This Quiet Credit Index – Another post pointing out the growing activity in the CDS index options market. Getting a full picture of CDX options activity is tough because trade sizes reported to the relevant swap data repository are capped at $110 million, “so it’s not possible to get a complete picture of where activity has been greatest,” according to Barclays analysts.


Everyone’s Been Worried About Liquidity in the Wrong Bond Market – Liquidity issues in corporate credit have grabbed all the headlines, but a duo of research notes published in June suggest that the focus on investors’ ability to trade corporate bonds is misplaced. For all the talk of slumping liquidity in the corporate bond market, it’s the boring old U.S. Treasury market where the trend has been most pronounced.

These New Petrobras Bonds Tell You a Lot About the State of Markets – An actual quote from this post about Petrobras, Brazil’s scandal-ridden, junk-rated, state-owned oil producer, selling bonds with a 100-year maturity went like this: “long-bonds have a history of coinciding with a market tops.” That turned out to be a pretty prescient analysis, since the Petrobras sale in early June pretty much coincided with the top in corporate credit as measured by the Bloomberg High Yield Index. (For those curious, Pimco, Fidelity and Capital Group were big buyers).

Here’s What Wall Street Says is Needed to Restart the Single-Name CDS Market – Less regulation, more clearing and the return of synthetic CDOs. Obviously.

Deutsche Bank to Bond Investors: Wake Up and Smell the Fundamentals – Deutsche Bank strategists Oleg Melentyev and Daniel Sorid figure that investors may (finally) be turning against an asset class that has been booming in recent years. The timing on this call was pretty good.

These Charts Show the Astounding Growth in Emerging Market Corporate Bonds – The emerging market sell-off would turn out to be a big theme of 2015 and with it, questions over the degree to which EM companies and sovereigns have taken advantage of years of low financing costs imported from the U.S. These charts from Barclays show, among other things, that EM corporate debt has grown faster than than every other fixed-income asset class, including U.S. Treasuries, over the past decade.

Bond Investors Are Getting Really Creative When it Comes to Hedging Their Risk – A rapidly-expanding market requires a hedge. If the usual ones for credit, like single-name CDS or CDS indices (discussed in more detail later) aren’t working, then investors have to use other things. In this case, it’s options on the CBOE’s VIX index.

Investors in Big Bond Funds Should Know About These Three Things – Cross-selling, matrix pricing, and payment in kind. Some of these issues would crop up later in the year when the Third Avenue Focused Credit Fund stopped redemptions and began liquidating.

Investment-Grade Bonds and Junk Bonds Are Looking More and More Alike – Citigroup’s Jason Shoup points out that the market’s valuation of investment-grade bonds relative to high-yield bonds is “starting to enter somewhat conspicuous territory.”

Meet the New Shadow Bank (It’s a Lot Like the Old Shadow Bank) – Mutual Funds and ETFs have the same weakness as the repo market, say Barclays analysts. Namely: run risk. Again this would crop up later in the year following the closure of Third Avenue’s credit fund.

Here’s a Bond Backed by Dirty Laundry – Esoteric asset-backed securities are God’s gift to financial journalists. This one is no different.

A Perfect Storm Brews for Bond Funds – Banks are pulling back on credit lines at precisely the same time some funds need them most.

Who Will Save the Repo Market? Barclays Has a Few Ideas – A shrinking repo market could offer opportunities to new players seeking to fill the gap of retreating banks (covered previously for the Financial Times here and here, for instance). Here are Barclays analysts discussing potential new entrants including the Federal Reserve, insurance companies, Reits and foreign investors like central banks and sovereign wealth funds.


S&P: All That Bond Market Illiquidity is Bad for Bond Funds, But Not Bank – Long-running theme about the shift of risks from banks to buyside.

Here’s the Most Interesting Thing in GSElevator’s New Book – The most scandalous episodes in the new book by @GSElevator aren’t the many salacious stories of deviance, debauchery, and excess but rather alleged bond market practices that include horse-trading of favors between bankers and investors—and a secret handshake agreement struck in a Hong Kong hotel. That agreement was to essentially set fees for new bond deals at minimum levels. Wish I could have written more about this since, from what I hear, it certainly wasn’t an isolated incident.

BlackRock’s Latest Fix for Bond Trading Is Circumventing Banks – A little market structure scoop buried in a(nother) BlackRock paper about bond market liquidity. As the world’s biggest asset manager put it: “We have begun to participate in a few inter-dealer broker (IDB) trading venues. Historically, buy-side market participants have not been able to participate in IDBs because IDBs have primarily served broker-dealers.”

AIG Mortgage Insurance Said Turned Into Bonds as Housing Revives – More structured finance fun (and a scoop to boot).

Maybe Investors Love Credit Index Options a Little Too Much – I wrote a previous summary over here.

Companies May Be Running Out of Time to Borrow From Bond Investors to Pay Shareholders – As written, equity investors who have benefited from a multiyear rally in stocks should have taken a little moment to thank their humble counterparts in the debt market.

Citigroup Selling $377 Million of Bonds Backed by Prosper Loans – More on Wall Street’s love affair with peer-to-peer lending. Citigroup’s funding of Prosper notes through its Chai securitisation programme would later turn out to be a very interesting story.

What No One Ever Says About Corporate Bond Market Liquidity – Wrote about it here. It’s a continual struggle to figure out new ways to write about a well-worn chestnut in the credit market, but I think this story does a good job bringing together multiple elements.

Hairy Days as New Bond Shops Struggle to Dent $8 Trillion Market – Starting an electronic bond trading platform seems difficult.


Credit Risk Is Staging a Comeback – For years, investors poured money into junk-rated corporate debt with impunity (see Jason Shoup above). In August 2015, that started to change, with CCC-rated bonds under particular scrutiny, a trend that would continue for the rest of the year.

A Towering Bond Trade Has Been Quietly Falling Apart – Same as above, discussing the C-C-Cracks in credit.

U.S. Regulators Said to Step Up Scrutiny of Fund Liquidity – Mini scoop about the mini steps taken by regulators on the issue of bond fund liquidity. And yet another story that would prove timely given later events at Third Avenue’s credit fund.

Citigroup: Something Big and Fundamental Has Changed in Markets – Another smart piece by Citigroup’s Matt King, and timely too. He warned that we’re vulnerable to hitting air pockets across multiple markets (not just credit) just days before the August 24 sell-off in stocks.

Bond Issuers and Investors Are About to Find Out It’s Not Easy Being Green(back-Denominated) – Years of low interest rates in the U.S. have encouraged emerging-market issuers to use the greenback for their borrowing needs. Both EM countries and companies in emerging markets flocked to sell dollar-denominated debt, with the BIS estimating that total dollar borrowing could now stand at as much as $9 trillion.


Citi: Capital Markets Now Control Oil Prices – From the concrete canyons of Lower Manhattan to the shale basins of West Texas, this report from Citigroup underscored the degree to which Wall Street has financed the U.S. oil boom and now controls its fate. Essential reading, IMO.

The Reward for Being First Out in a Bond Run Is 2% – An estimate by Barclays that would prove very interesting some three months later, again after Third Avenue shuttered its credit fund to avoid “resorting to sales at prices that would unfairly disadvantage the remaining shareholders.”

Commercial Credit Is the New Mortgage Credit – Another long-running theme (covered previously at the FT here). While sales of private-label mortgage bonds have shrivelled, sales of bonds backed by various types of commercial credit have been surging.

Eight Things That ZIRP Did for the Corporate Bond Market – Proof that listicles can be effective means of summarizing big trends in markets.

Investors Are Paying Extra for Environmentally Friendly Bonds, Barclays Says – Analysts Ryan Preclaw and Anthony Bakshi find that investors have been paying an extra 20 basis points for the warm and fuzzy feeling of being environmentally friendly and investing in green bonds. In fact, Barclays’s research shows the added cost of being green has been increasing steadily over time, in tandem with an influx of interest from investors.

This Chart Helps Explain the Bond Market Liquidity Story – As previously (and repeatedly) written, financial regulation is not the only reason behind alleged deteriorating liquidity in the corporate bond market. Low interest rates and buoyant demand effectively squeeze the returns investors can make, known as “carry” in bond market parlance. With the way bonds change hands still stubbornly resisting change, the cost of trading hasn’t come down enough to offset that slumping carry, making it more expensive for investors to buy and sell debt.

Wall Street Is Desperate for a Better Credit Hedge – A dive into Markit’s revamping of the CDX HY index.

Glencore Is Having a Terrible Day, Credit Default Swap Edition – Glencore CDS began trading upfront;”a subtle, presentational point but a crucial one that speaks to the degree of distress currently surrounding the company, which only three years ago was completing a massive merger with Xstrata, as well as banks’ expectations that this distress will likely continue for a while longer.” How quickly things change in markets sometimes.

Market Moves That Aren’t Supposed to Happen Keep Happening (U.S. Treasuries edition) – Not strictly corporate credit, but I’m including it on this list because I think a similar argument could be applied to the corporate bond market. Measures of average liquidity conditions (average bid-ask spreads, trading volumes etc.) don’t look abnormal at all, but the problem lies in tail risk events (also known as sell-offs).


These Charts Show the Big Change in Chinese Corporate Debt Since 2007 – Can you paint with all the colors of China’s collapsing corporate commodities complex? Yes, answered the analysts at Macquarie Research. The results are in this post.

It’s Been a Terrible Week for the Credit Market – The end of October brought with it a terrible turn for credit markets, to be repeated later in the year.

Investors Are Asking Tough Questions About ‘Yieldcos’ – More on the link between capital markets and commodities, and previously mentioned on this blog. As written: “The concern now is that funding structures built on that fragile dynamic are apt to collapse should investors come to believe that the financing of latent commodity demand has far outpaced actual growth.” The future of SunEdison remains a matter of much debate.

Deutsche Bank Asks if the Corporate Default Cycle Has Started – More good timing from Deutsche’s credit strategists.

Barclays: Petrodollars Were Basically Another Quantitative Easing – The unwinding of the commodities complex is arguably playing out in two ways in global financial markets. The first is a decline in the amount of petrodollars – money earned from the sale of oil – circulating in the global economy, which takes away a substantial source of demand for financial assets. The second is in the sudden revaluation of the worth of many business models that had been predicated on higher and higher commodities prices (and, as above, borrowed billions from capital markets).

Bond Funds Have Been Borrowing to Boost Returns – A long-running theme underscored by a new paper from the Bank for International Settlements showing the degree to which leverage-a concept more traditionally associated with sell-side banks-has infiltrated into the boring old buy side.

UBS: This is How Troubles in the Bond Market Could Impact Stocks – The idea here is that the hybrid mutual funds carrying big portfolios of both debt and equities could be hard-hit in the event of a long-awaited liquidity crunch that sparks turmoil in the corporate bond market. In that scenario, such funds might find themselves having to meet redemption requests by selling more liquid assets from their portfolios, such as stocks and U.S. Treasuries, as opposed to harder-to-trade corporate bonds.

Five Weird Capital Markets Observations Concerning Dell’s Big Bid for EMC – A list that includes huge dependence on debt markets, tracking stock, a kind of odd credit rating, a lack of change of control clauses, and potential subordination for existing Dell debtholders.

The Great Ball of China Money Rolls Into Bonds – As written, China’s markets resemble nothing if not a great rolling ball of money that moves from asset class to asset class, constantly searching for the next source of sizable returns. After shifting away from stocks in the summer, when the value of the Shanghai Composite Index almost halved, the Great Ball of China found a new home: bonds sold by Chinese corporates.

Jim Chanos Nails the Link Between Debt and Energy – “Energy Investments After The Fall: Opportunity Or Slippery Slope?” So began this presentation from Jim Chanos. What follows was a powerful outline of the spirally debt dynamics that now dominate the future of the oil industry.

Short Sellers Aren’t Valeant’s Biggest Problem – The link between capital markets and short-sellers laid bare in the latest leg of the Valeant saga.

Bonds of the Corporations, by the Corporations, and for the Corporations – “With an estimated increase of nearly $70bn (up 30 percent year-on-year), corporates have been one of the largest incremental buyers of investment grade credit,” according to Barclays estimates.

A Short History of Chinese Bond Defaults – Moral hazard in the Chinese corporate bond market? Well I never…

Thiel, Soros Said to Lead $25 Million Investment in TruMid – Electronic bond trading platforms do not always have a stunning success record, but some of them certainly seem to be good at attracting money. Here’s a scoop about TruMid nabbing some funding from Peter Thiel and George Soros, but it also includes this very fun quote from a former Goldman Sachs trader:  “The days of a very skilled market maker that has the ability to set his or her own level of risk are over … The business of trading bonds at banks is now glorified order taking.”

BofAML: Markets Are Once Again Mispricing Tail Risk in Credit – BofAML analysts said that the most senior portions of the CDX High Yield index are trading at (tight) levels last seen in 2007, when tail risk in the credit market might have been considered to be widely mispriced. (Worth contrasting this stance with Citigroup analysts a month and a half later, who said that the CDX index had now overshot fundamentals).


These Charts Suggest the Market May Have Had Enough of Share Buybacks – Or at least the bond market has, according to Citigroup analysts.

The Accounting Technique Valeant Used to Help It Buy Company After Company – A somewhat controversial post, this is a riff on accounting adjustments known as add-backs and how they helped Valeant continuously tap the debt market. (Previous coverage here).

Goldman Sachs Says Corporate America Has Quietly Re-levered – Corporate leverage is now at its highest level in a decade, according to this analysis from Goldman Sachs, with much of the debt issued being used to fund share buybacks or big M&A deals.

Can Anything Stop Companies From Loading Up on Debt? UBS Says No. – An amazing note from UBS analysts that included the following statements regarding corporate leadership and rating agencies: “We find that corporate CFOs historically are inherently backward-looking when setting corporate financing decisions, relying on past extrapolations of economic activity, even when current market pricing suggests future investment returns may be lower,” and “Rating agencies remain heavily dependent on new issuance activity, face significant competitive pressures (as issuers will select two of three ratings) and appear unconcerned with where we are in the credit cycle (e.g., see Moody’s latest conference call).”

Money Managers Now Have a Record Proportion of Their Portfolio Dedicated to Corporate Bonds – Allocations to corporate bonds by big buy-side investors reached 35.5 percent in mid-November, according to the Stone McCarthy survey of senior money managers. It was an all-time high for a data series that began back in 1999, and a record reached just a month or so before the Federal Reserve was expected to raise interest rates.

Investors Are Taking the Air out of Some of the Hottest ‘Yield Plays’ in Markets – Self-explanatory and should have been entirely expected just weeks ahead of the Federal Reserve’s expected interest rate rise. Included on the list are cracks in corporate credit, tamed unicorns, unwanted leveraged loans, worries over yieldcos, and a bunch of beaten-down acronyms including MLPs, BDCs, IPOs and Reits.

Sales of Structured Products Tell Us a Lot About the Global Search for Yield – Again, not strictly about corporate bonds but certainly in the same thematic family.  Annual sales of retail structured products are expected to reach their highest level for seven years at about $560bn.


There’s Been a Bezzle-Fueled Boom in Bonds – Shrinking risk premiums! Disappearing analysts! Weakening balance sheets. Here’s A round-up of things that have been obscured or caused by the boom in corporate bonds. (Pretty good timing considering the market really began falling out of bed about a week later). There’s a video of me trying to explain the bezzle concept and its potential application to corporate bonds over here).

Cognitive Dissonance, Chinese Bank Bond Edition – Investors are demanding itty bitty risk premiums to buy junior bank bonds most exposed to losses. It’s almost like they expect some kind of government support! See also, my moral hazard comment above.

Building a Better Credit Hedge Is Proving Much Harder Than Expected – Markit’s revamp of the CDX high-yield index was supposed to make it a better hedge for the underlying cash market. Some investors and analysts say it’s still not working for that specific purpose. (In another sense, it is a victim of its own success as more investors use the derivatives index to make up for deteriorating liquidity in the underlying cash market).

Bond Funds Are On Their Own – Again, credit risk has migrated from banks to asset managers. As I tweeted previously, this is a feature (not a bug) of post-financial crisis regulatory reform, but it does make for uncomfortable situations for the buy-side.  “We have been getting a call every month or so with a coverage change,” says one portfolio manager.

The Guy Who Warned About Broken Libor Now Sees Fast-Money Financing as the New Risk – Not strictly just about corporate bonds, but Scott Peng (who warned about manipulated Libor way back in 2008) includes bond funds and asset managers in his definition of shadow banking.

When It Comes to Credit Carnage, It’s the Financing, Stupid! – Big changes to bank balance sheets aren’t just about dealer inventories, but also about things like repo and the slow grind higher in interest rates that is helping to make the cost of financing credit much more expensive.

This Junk Bond Derivative Index Is Saying Something Scary About Defaults – The CDX index is pricing in about a 21 percent loss on high-yield bonds over a five-year period, more than the 14.2 percent loss rate seen in the aftermath of the financial crisis. Are CDS spreads over-reacting to the late 2015 carnage in credit? Citigroup analysts seem to think so (and certainly it would seem like liquidity premiums play a role in this)

The Accidental Distressed Debt Fund – Third Avenue was an open-ended distressed debt mutual fund that acted a lot like a high-yield bond mutual fund. The question now is whether genuine high-yield bond fund managers find themselves reluctantly thrust into the role of distressed debt managers as contagion in credit markets spreads and more high-yield bonds start to trade at distressed levels.

Markets Are Getting Jumpier, and We Can’t Tell if That’s Good or Bad – Pretty much sums up the year for me and is based on a BofAML note pointing out that markets appear to be experiencing more frequent – but so far more contained – shocks. For now that seems like a good thing – the system as a whole is more resilient though it does make for nasty surprises for professional and retail investors.

Let’s see what next year brings.

Leave a Reply

Your email address will not be published. Required fields are marked *