Replies to post #6 on High-yield/macroeconomics (fka YIELD)

[Jonathan Robinson]

Did you compile those yourself? Nice job.

On the quote referencing Greenspan saying he would have cut rates already, I disagree. Go back to 1998 and note he only cut rates after LTCM had been bailed out by the banks. Crisis started in August with swap spreads moving out 10s of bps, HY moving out modestly (much less than today), mortgages (prime only back then) moving out 20-30 bps, etc. It continued into September with fed cut in late September or October (forget which).

Move to today. In late July/early August, all the same spreads exploded out (HY move was sharper initially and from similar levels to 1998) although I would point out that EM spreads have moved much less today (trigger of that crisis) while prime mortgages probably much more (this year's trigger along with LBOs - don't have data but with jumbos out by 150 bps . . . ) while HY back then moved less than now but eventual move was 300-400 bps back then (vs. 100-150 bps now that HY has somewhat stabilized in front of a massive mountain of deals). Also, the quoted changes in yield spreads are being exacerbated by reduced Treasury yields (same as in 1998 when yields were first approaching 5%, now below as they have been for most of intervening years) and some changes refer to derivative index changes (where violent hedging is taking place) as opposed to cash market - HYG is only down from 106 to 100/101, implying only 100 bps or so of yield pick-up while HY derivative indexes have moved 150 bps and initially as much as 300 bps.

I also find it ironic LTCM was bailed out in 1998 because of worries about the banking sytem (loss per bank would have been $150-200 MM or so) vs. today with $350 B of LBO debt sitting on bank balance sheets either funded or committed and a likely 5-10% haircut needed to clear the paper - implies losses of $20ish BILLION among 10 key banks or about $2 BILLION of losses per bank. Magnitude of issue today is probably bigger, even accounting for growth and consolidation, especially when one adds subprime.

Jon