The End

The End

Is this the end? Are you my friend?
It seems to me, you ought to be free.
You used to be mine when the chips were down.
You used to be mine when I weren’t around…
The Doors.

Those immortal lyrics spring to mind courtesy of this Citi survey of investors:

I’ve been surprised by the suddenness with which markets appear to have shifted gears from an apparent six-year reliance on easy monetary policy to pinning their hopes on the expectation of fiscal stimulus that is still far from materializing. We’ve touched on it in our various coverage at Bloomberg but it seems this will be the theme to watch in 2017. How rapid is the tightening? How pervasive? And, crucially, can the market remain relatively resilient in the face of rising rates and investors who still have a massive long position on credit?

Speaking of which, as is becoming tradition around here, here’s this year’s list of credit coverage. You’ll notice it peters out as the year goes by. That’s because I got busy with a new home and some new work. See you in the new year and here’s hoping your 2017 be filled with all the right kind of surprises.


Last Year Was a Big One for the Corporate Bond Market – A good place to start! 2015 saw junk bonds  record their worst annual returns in a year not marked by a U.S. recession in a decade, with a fall of 4.7 percent. Meanwhile a record $1.3 trillion worth of investment-grade debt was sold. Finally, a record share of the corporate bond market was owned by mutual funds and ETFs at about 25 percent of the market.

All That Commercial Lending by Banks Suddenly Isn’t Looking so Hot – The depths of the January sell-off saw Deutsche Bank analysts warning that losses on C&I portfolios could end up as high as 90 basis points in 2016. The quality of commercial loans on banks books remains a

Bigger, Beerier Bonds Are the New Front in Bond Market Liquidity –  Those record sales of corporate bonds in 2015 were largely fueled by dozens of mega-deals with about 47 deals worth over $5 billion or more came to market – up from the 28 sold in 2014. Investors like bigger bond deals since can they offer more liquidity but there’s a problem…

Does the Corporate Bond Market Have a ‘FANG’ Problem? – A handful of dominant stocks were responsible for rescuing the U.S. equities market last year. Can the same be said for the corporate bond market? Features this choice quote from Peter Atwater: “In the fixed-income market, bond investors must love the most indebted companies. The more debt a company can issue, the more their debt must be bought.”

Cembalest: The Tide Has Turned for Corporate Credit – In retrospect this from the chairman of market and investment strategy at JPMorgan Chase’s asset management group was mis-timed. The corporate bond market continues to defy expectations even in the face of rising interest rates.

Watch Out for Those Falling, Oil-Soaked Angels – The amount of oil companies getting downgraded means a whole lot more junk-rated supply will come into the market.

Goldman’s Former Head of Junk Bond Trading Has Some Choice Words About the Credit Market – Also mis-timed from Jeff Bahl. Though it’s hard to argue that this dynamic – “At issue is the feedback loop that has allowed companies to take on ever increasing amounts of debt, helped by investors chasing the uncorrelated and higher returns on offer from junk bonds” – will efficiently end in tears.

Pimco Asks If Swap Rates Could Be the New Risk-Free Benchmark for Bonds – A rather radical idea but one that I had heard talk of even before this Pimco piece came out; could swap spreads come to replace U.S. Treasury yields as the risk-free benchmark for debt? “In a world of centrally cleared swaps, one could argue the true benchmark for a credit-free and funding-free interest rate is not U.S. Treasuries but rather a centrally cleared swap,” says this guy.

When Systematic Trading Comes to Credit Markets – If you’re worried about the inherent leverage embedded in credit options and the like – then wait ’till we have waves of automated buying and selling!

When Credit Market Concerns Arrive at the Marketplace Lenders – Not many people noticed but Lending Club began hiking interest rates early this year. In retrospect, that would be one sign of the funding troubles to come.


Deutsche Bank’s Jim Reid: Just Wait ‘Til Corporate Bonds Go Negative, Too – Jim Reid posits that it’s only a matter of time before yields on corporate bonds sold by investment-grade European companies dip below zero in light of continued central bank easing and a sustained rally in the region’s corporate paper. Fast forward a couple months and…

Citi: There’s Been a Worrisome Change in the Market for New Corporate Debt – The sell-off earlier in the year meant the new-issue market got a bit patchy. That’s been a rare thing since the financial crisis.


Barclays Will No Longer Be Sending Its Debt Research to the Media – This still upsets me.

Junk Bond Indexes Are Getting Junkier – Downgrades mean the junk bond indexes get, well, junkier.

Behold! The First Covered Bond to Be Sold With a Negative Yield – What would Frederick the Great think?

There’s a Potential Problem with the ECB’s Plan to Buy Corporate Debt – The ECB’s corporate debt purchase programme was big news this year but there was a not-small problem that echoes some of the structural issues of the monetary union itself. If you want to buy investment-grade European paper in size, then, frankly, certain eurozone countries have a lot more of it than others.

More Trouble in Bonds Backed by Peer-to-Peer Loans – This was before news of Lending Club big troubles broke, but it highlights some of the challenges facing the nascent marketplace lending sector. Moody’s downgrading a P2P bond just weeks after rating it is rarely a good sign, meanwhile losses in one securitisation of marketplace loans sold in 2015 ended up overwhelming its trigger value.

Bond Investors Are Wondering What Kind of Guest the ECB Will Be at the Corporate Debt Party – Hopefully the kind that brings lots of liquidity!

This Is What’s Going On Beneath the Subprime Auto-Loan Turmoil – One of my most consistently-visited posts this year, oddly. 

Three Charts That Show the Corporate Bond Market Has Come Roaring Back – What a turnaround from earlier in the year.

Why the ECB Could Get Some Junk With Its Bond-Buying Program – This ended up happening a month or two later.

About All That Money That’s Been Flowing into Emerging Market Debt… – “The recent rally in emerging market bonds has been pretty good, but it could also be beta,” is probably one of my all-time favourite ledes. It still cracks me up. I need help.

Meet the Haves and Have-Nots of U.S. Corporate Credit – Why doesn’t anyone care about inequality in the corporate bond market? (This is a joke, please don’t send me angry emails).


Bankers May Have Been Underpricing Corporate Bonds by as Much as $18 Billion – An occasional series into the fuzziness of the new-issue market.

The Federal Reserve ‘Twisted’ the Corporate Bond Market Too – Reach for yield? Regulatory arbitrage? Obscure central bank stimulus programs?! It’s all here in a new Federal Reserve working paper by a trio of economists seeking to parse the impact of unconventional monetary policy on corporate debt.

Help! These Fallen Angels Have Fallen and They Can’t Get Up – Consider this an addendum to this post from earlier in the year. Some downgraded companies were left out of the recovery.

Welcome to the China Debt, Shadow Banking, Wealth Management Product Nexus – At least eight state-owned enterprises have run into some sort of repayment problem this year. Bank of America Merrill Lynch’s China strategists argues that SEO-issued debt could eventually come to destabilize a much wider slew of China’s investment landscape via all those WMPs.


Goldman: The Search for Yield Is Just Getting Started – Credit fund managers who missed the earlier rally in junk-rated debt were forced to re-enter the fray after underperforming the wider market. Whiplash, thy name is high-yield credit.

China’s Financing is Growing Pretty Circular, Deutsche Bank Says – I like the lede on this and the Deutsche Bank analysis.

Defaults Have Already Spread Outside Commodities – I find the persistent notion that defaults will forever stay confined to the energy sector odd.


From One Collateral Shortage to the Next – Not a pure credit piece per se but it does speak to the tendency of the financial system to manufacture ‘safe’ securities in times when government-issued debt is in short supply. Plus it begins with a killer historical anecdote. See also the works of the wonderful Zoltan Pozsar.

The Explosion in Quasi-Sovereign Bond Issuance Is Making Analysts Queasy –  Which fixed-income asset class is growing fast, outperforms similar debt issues, and (so far) rarely defaults? Emerging market ‘quasi-sovereign’ bonds, of course!

Mutual Funds Are Scrambling to Buy Corporate Bonds – From sell-off to squeeze? Mutual funds have snapped up $275 billion worth of investment-grade debt as of June 2015 — far outstripping the net supply of new debt that had been sold into the market, according to Deutsche Bank figures.

China’s New Dollar Bonds Give HSBC a Sense of Deja Vu – There’s nothing new under the sun – especially not China dollar bonds that look a lot like ITICs.

The ECB’s Corporate Bond-Buying Is Making Waves All the Way to the U.S. – From ECB to shining sea.

How’s That Credit Hedge Working Out for You? – The ECB’s bond-buying program helped tighten cash spreads but did little for synthetic indices. That divergence illustrates a long-running trend in credit markets, where the use of single-name CDS tied to the fortunes of a single company has all but disappeared at the same time that the volume of cash bonds outstanding has exploded and the debt has arguably become more difficult to trade.

Brexit Is (Even) Badder News for Britain’s Corporate Bond Market – Did you know that annual sales of sterling-denominated corporate debt have almost halved since 2012? Shocking.

Goldman: China’s Corporate Bonds Are a ‘Microcosm’ of Its Credit Problems – Want a clue as to whether China will embark on structural reform of its bloated corporate sector, or shed its addiction to credit-fuelled growth? Analysts at Goldman Sachs Group Inc. suggest watching the onshore Chinese bond market for defaults.


No One Really Knows What Open-Ended Funds Will Do – While mutual funds counted $23 billion worth of assets in 1962, today they are worth trillions and have, like much of the financial world, expanded their repertoire to encompass less liquid assets including commercial property and, of course, corporate debt. Credit lines and cash buffers have been built up to offset this illiquidity, but the ultimate effect of a massively enlarged and evolved fund industry — and whether it will prove as level-headed as its ancestors — remains a wild card.

When Bank Capital Standards Aren’t Actually That Standard – Not strictly credit but I’m putting it here because it amuses me. “Fifty shades of banking regulation might not sound very titillating. Perhaps it should be. A new Federal Reserve working paper lays bare the degree to which ostensibly black-and-white rules set by the Basel Committee on Banking Supervision differ in their implementation.” Teheehee.

Investors Want to Have Their Corporate Bonds and Eat Them Too – U.S. high-grade debt is “the only game in town” – featuring a heady mix of investment-grade credit ratings, yield, and size – according to Bank of America Merrill Lynch. That is not a good thing in the long-run. The big question is how do companies continue to serve up new debt in the face of rising opposition to adding leverage?

Never Before Has the European Credit Landscape Been This Boring – or This Interesting – It’s a B-B-Boring world in corporate bonds and investors just live in it.

Figuring Out the Bank of England’s Corporate Bond-Buying Program Is Turning Into Big Business – Parsing the size of a potential BOE purchases “is far from being of only academic interest,” according to Citi analysts.


This Is How Leverage in the Financial System Lives On – Has a small section on the leverage introduced by credit index options etc. but is a wider musing on leverage in the aftermath of the financial crisis. It’s still there! Just in a different form and attached to different players.


How ‘Zombie’ Oil Companies Stay Alive in Life-or-Death Debt Markets – Alternate title: Ever wonder what the U.S. high-yield default rate looks like without distressed exchanges?
Here’s Everything Analysts Think Is Wrong With the Bank of England’s Bond-Buying – This was fun to put together.

Supersized Corporate Bond Sales Are Taking a Bigger Bite Out of an $8 Trillion Market – Picking up on an earlier theme in the year. Like junk food, the growth of outsized debt deals comes with a health warning as it may result in a handful of huge issuers dominating the market, or allow companies to increase borrowing levels to subsidize greater payouts for their shareholders.


Corporate Bonds Have Become a Deal-Seeker’s Nightmare – Rising currency hedging costs mean investors are facing unpalatable choices leading to “the definition of reach-for-yield behavior,” according to Deutsche Bank analysts. FX-related expenses mean non-U.S. investors must assume more risk to generate yield – either by buying lower-quality debt or opting not to fully hedge their currency risk. This is a problem that, if anything, has gotten worse later in the year.


Why China’s Latest ‘Financial Innovation’ Might Not Work – China introduced CDS on companies sometime in the fall, begging the question of just who is selling protection on Chinese corporates?

How Donald Trump Could Exacerbate a Global Dollar Shortage – It’s not hard to imagine that a Trump administration is unlikely to be friendly to the free-flow of capital. While this post is not explicitly about credit, you could read musings on a global dollar shortage in conjunction with Deutsche Bank’s thoughts on higher FX hedging costs exacerbating the search for yield and wonder…

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