Biggest Credit Bubble In History Cracks, Trips Up The Smart Money

Monday, May 5, 2014
By Paul Martin

Wolf Richter
Testosteronepit.com
MONDAY, MAY 5, 2014

For years it seemed nothing could slow down the tsunami of junk debt. Yield-desperate investors, driven to near insanity by iron-fisted central-bank interest-rate repression, were holding their nose and closing their eyes while grabbing the riskiest paper under the crappiest conditions from the bottom of the barrel in their no-holds-barred chase to get a tiny little bit of extra yield.

So last week, French cable TV company Numericable, a subsidiary of multinational cable and telecom company Altice, sold $7.78 billion and €2.25 billion of junk bonds, an all-time record. Insatiable demand allowed the company to sell this stuff at irrationally low yields, given the risks, with some notes yielding as little as 5%. The deal blew past the prior record, Sprint’s sale in September of $6.5 billion in junk bonds. The funds will be used to fund the acquisition of its French competitor, SFR.

That was April 23. But now cracks in the most malodorous corners of the junk debt bubble have appeared.

Investors had gone on a feeding frenzy and poured money into mutual funds that specialize in “leveraged loans” whose “high yield,” if you ignored the risks, made them relatively attractive in the zero-interest-rate environment that the Fed and other central banks inflicted on the land. These mutual funds, endowed with conservative-sounding names and glossy charts, were marketed to retail investors. And retail investors poured money into them, and fund managers went out to blow it on leveraged loans. Why? Because it was their job. The buying binge pushed down yields on even the crappiest loans to the level that one-year FDIC-insured CDs paid in saner times before the financial crisis – before the Fed’s machinations converted the credit market into an absurd game in which “high-yield” has become a misnomer.

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