Re-inflating the bubble
February 3 – Financial Times (Tracy Alloway): “The use of lower-rated debt in a key US funding market has returned to pre-crisis levels, fuelling fears that the so-called shadow banking system is becoming riskier. The repo market is an important part of the shadow banking sector, which consists of unregulated financial institutions and activities… When the US housing bubble burst, the banks’ trading partners refused to accept such securities as collateral and the repo market rapidly contracted. However, a study by Fitch Ratings says the proportion of bundled debt being used as security in repo transactions has returned to pre-crisis levels… ‘These are less liquid, longer-tenor assets that are funded short-term by highly risk-averse lenders,’ said Robert Grossman, head of macro credit research at Fitch. ‘In a period of market turbulence, all of the parties to a repo would be affected,’ he added, meaning that both banks and funds could be hit.”
February 1 – Financial Times (Nicole Bullock and Robin Wigglesworth): “Junk bonds, until last year one of the favoured post-crisis asset classes for many investors, are enjoying a vigorous rally that has drawn comparisons with the credit boom. US corporate debt rated below investment grade, or junk, has notched up a 3% return this year, according to Barclays Capital… Issuance has reached $19.5bn, Dealogic says… European junk bonds have returned 5.3% to investors and issuance has rebounded to almost $6bn. ‘We’ve seen nothing like it [in Europe] since the halcyon days before the subprime crisis,’ Suki Mann, a strategist at Société Générale said… ‘This is effectively a massive rally in credit. The message isn’t hidden or subtle: buy corporate bonds, simple. Rather add risk, any risk and there’s no point in being measured about it.”
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