Be prepared for the next great transfer of wealth. Buy physical silver and storable food.
zerohedge.com / by Tyler Durden / 02/28/2016 10:27 -0500
Two weeks ago, during the peak of the February market rout, UBS’ credit strategist Matthew Mish looked at the latest round in the junk bond selloff and answered a rhetorical question: “Is it time to buy” the bonds that comprise some/any/all of the bonds that make up the USD-denominated $3 trillion speculative grade universe. His answer was hardly pleasant for those who have kept peddling junk credit (including bonds, loans and revolvers) for the past several months:
- First, investors will require compensation for loss risks; cohorts of triple Cs typically experience 5yr cumulative default rates of 55 – 65% near the end of the cycle, implying half of the universe defaults before the end of year 5 and no longer pay coupons. Assuming recovery rates of 35% an investor should require roughly 12% yield to compensate for loss risks alone.
- What about mark-to-market and liquidity risks? While triple C bonds are trading on average in the low $60s, investors will likely need to stomach a further decline later in the cycle. Historically, triple C prices bottomed in the $40 – 50 range, so potential MTM declines could be significant.
And while the fundamentals’ clear answer is “not yet”, the one thing that concerned Mish the most is the ever rising illiquidity in the bond space, which is what prompted him to conclude that for junk yields have to hit as high as 25% before they become “attractive”:
… investors will need to be compensated for the fact that illiquidity may prevent them from selling when needed. Bottom line, our conversations with investors suggest yields in the 20 – 25% context could be attractive enough to draw in marginal capital –although several investors noted that is reasonable for triple C risk excluding commodities. In short, we’re not there yet.
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Thanks to BrotherJohnF