Ending Badly
Courtesy of Michael Panzner at Financial Armageddon
Just three weeks ago, in "Another Accident Waiting to Happen," I highlighted several reports detailing what I described as the "wild feeding frenzy taking place in the fixed-income markets, especially those involving the riskiest kinds of securities." I added: "Call me a cynic, but how does this not end badly?"
Well, based on the following Bloomberg report,"Libor Shows Strain, Sales Dwindle, Spreads Soar: Credit Markets," it looks like it already is (ending badly, that is):
Corporate bond sales are poised for their worst month in a decade, while relative yields are rising at the fastest pace since Lehman Brothers Holdings Inc.’s collapse as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence.
Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly gain since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows.
Concern that European leaders won’t be able to coordinate a response to rising levels of government debt from Greece to Spain, while U.S. legislation threatens to curb credit and hurt bank profits, is driving investors away from all but the safest securities. The rate banks say they charge each other for three- month loans in dollars has almost doubled since February.
“This is a quintessential liquidity crisis,” said William Cunningham, head of credit strategies and fixed-income research at Boston-based State Street Corp.’s investment unit, which oversees almost $2 trillion. “It’s not inconceivable to imagine a situation where the markets behave so poorly, the liquidity behaves so badly, and risk-tolerance just evaporates that — particularly in Europe — consumers contract, businesses stop hiring and stop investing, and economic activity halts.”
