Salient to Investors:

  • Global debt complacency is evidenced by investor enthusiasm for the debt of Ecuador, Clear Channel Communications, China’s Logan Property Holdings, Greece’s Hellenic Petroleum, Florida’s Orange County Industrial Development Authority. Japan’s Government Pension Investment Fund is even considering venturing into junk bonds. Almost any borrower is able to raise debt with few questions asked even as the World Bank cuts its outlook for global economic growth.
  • Fred H. Senft Jr. at Key Private Bank says overexuberancy can last a while but when it turns it will turn quickly and very ugly.
  • The Bank of America Merrill Lynch Global High Yield Index took 12 years from its start at the end of 1997 to get to $1 trillion, but only 4 years to get to $2 trillion. 2015 is on track to top 2014’s record of $477 billion.
  • Moody’s Investors Service said its measure of the strength of junk-bond covenants is the weakest since it started tracking the data in 2011. For the first time, more than half of the junk-rated loans made in the US lack typical lender protections like limits on the amount of debt they can amass relative to earnings. Moody’s said the global default rate fell to 2.3 percent in May versus the historical average of 4.7 percent, but junk-rated borrowers have $737 billion of debt due in the next 5 years.
  • A measure of risk that uses options to forecast volatility in equities, currencies, commodities and bonds has fallen to its lowest level on record.
  • Jason Rosiak at Pacific Asset Management said the market has been picked over.
  • BIS said central bankers should not complain too loudly about complacency because they are responsible.
  • Junk bonds have returned 157 percent since the depths of the 2008 financial crisis versus 123 percent for the MSCI All-Countries World Index.
  • Yields fell to a record low 5.6 percent in June, 2.5 percentage points below the average of the past decade.
  • Martin Fridson at Lehmann, Livian, Fridson Advisors said it is as extreme as it gets and yield spreads are 2 percentage points too tight.

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