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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (157816)	9/28/2011 9:21:48 PM
From: sammie44	2 Recommendations Respond to of 206326

OT: junk bond spreads Jacob, are you talking high yield or investment grade companies? High yield companies don't use the CP market so I'm not sure why that entered the discussion. Sure IG companies use CP but junk companies use LT fixed rate bonds and revolvers, so they aren't really reliant on rolling short-term paper. That is more of an issue for IG companies, not the junk market. GE is dumb. GECC borrows short and lends long. Its a bank. They got caught with their pants down in 2008. Jack Welch isn't the genius he's made out to be. Anyone can leverage money for good returns until the leverage cuts the other way. That's what he was doing when he built GECC. I'm not implying widening spreads aren't bad. They are for companies and for the economy in general. But if you are CFO and need to issue at 600 over a 2% 10-yr treasury, 8% money isn't so bad on an after tax basis (5.2% if your tax rate is 35%). Even 10% paper is only 6.5% after-tax. In the past when spreads were this wide, treasury rates were much higher, so if you needed to tap the markets you were forced to lock in long-term money at an even higher all-in rate. You showed a chart of spreads. All-in rates are what CFOs mostly care about. Said a different way for the relationship to treasuries, the 200 bps move in 10-yr treasuries from 4% to 2% has offset 200 bps of spread widening from the perspective of what CFOs care about. Few points from a recent JPM piece: Refinancing activity completed during the first 5 months of 2011 exceeds total maturities between now and YE 2013 ($210bn). Debt maturing in 2012 through 2014 has been reduced by $560bn since the start of 2009. Only $175bn of bonds and loans mature through year-end 2013. (Note, the HY market is over $1 trillion mkt so only about 15% of all paper outstanding comes due in next 2+ years. Excess spreads beyond expected or even stressed default loss assumptions near historic highs. High-yield spreads currently price in about a 50% chance of a recession The junk bond market has had only four down years since 1980. Junk bonds have overperformed equities with less volatility over extended periods of time. Companies weren't prepared for the dislocation of the HY market in 2008. They are as a whole much more prepared today. That's my only point and the data backs it up. I'm not implying the collective market isn't saying the sht is about to hit the fan, but indicators aren't always right and we are only splitting hairs between technicals and fundamentals. Junk spreads in 2008 implied massive defaults across the entire market. That didn't happen, which is why the junk market returned 60% in 2009. Spreads and assumed recovery rates can be used to calculate forward looking default rates. What current junk spreads are implying isn't likely even in most downside scenarios. That's the fundamental side. Technically, no reason true 'value' isn't about to get run over by fear. It happens all the time. regards