06 April 2013

You No Longer Interest Me

Another day, more data. Floyd Norris has more on falling interest rates in today's NY Times. Yet more pretty graphs, detailing that it's getting harder to earn money by doing nothing. When I was growing up in a poor but unhappy white trash housing project, the epithet "coupon clipper" had two meanings: the folks who had to use newspaper grocery store coupons in order to eat, and those who lived in the big brick houses off the proceeds of clipping coupons off their bonds.

The fallout from Greenspan's original interest rate cratering continues.
JUNK bonds have never been more popular, even if they no longer deserve to be called high-yield bonds, the more polite description that Wall Street prefers.
At the same time, the yield on such bonds has fallen to the lowest level on record. The Bank of America Merrill Lynch U.S. High Yield index yielded 5.7 percent at the end of the quarter, as can be seen in the accompanying graph. That was down from 6.1 percent at the end of the year, and from 8.3 percent at the end of 2011.

What's going on here is that the moneyed class had gotten used to getting 10% (or thereabouts) on their accumulated moolah risk free. Ah, the soft sofa of Treasuries. Not so much anymore. As explained in recent missives, real returns on physical investment has been falling for some time. Since these returns are the bedrock of capital markets, what happens in the real world of physics and engineering, has a direct impact on fiduciary capital. Real returns on physical investment are the only source of the vig to pay the interest. All those fiduciary and non-productive (infrastructure, real estate) uses have to connect back to some source of increased productivity. Otherwise, it's merely a case of robbing Peter to pay Paul: a zero sum game. The financial services "industry" is just that; taking its profit from the stream of moolah from savers to borrowers. When borrowers use the moolah in non-productive ways, the only way to pay the vig is with inflation puffed up cash. In other words, inflation is a good thing for the crooks.

Anyway, Norris has some (what appears to be) proprietary data, nicely graphed (they're linked to, not in the main body; all in one place in my dead trees version. Ha!). At usual, when moolah floods some sector, returns go down as prices go up. It's just more immediately obvious in bond markets.
Mr. Fridson also noted that nearly a third of the companies that issued high-yield bonds for the first time in 2012 were among the lowest-quality borrowers. "When high-yield managers are under pressure to invest large cash inflows, as they were last year, and when high-yield issuers feel no particular pressure to borrow, the financing window may open to lower-quality credits that would be excluded under other circumstances," he wrote in a commentary published by Standard & Poor's Leveraged Commentary and Data.

What goes undescribed, and likely hidden from public data, is how these high-yield instruments are used. If they're used to build new plant and equipment, in cutting edge industries, all well and good. Not so much.

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