Time bomb to the next crash is ticking as debt sales surge

Source - UK Telegraph

When dotcoms crashed, sub-prime imploded and banks collapsed it was not hard to find the markets’ Cassandras who had spotted the problem and either made millions betting against the bubble or written a book explaining how it was all going to go wrong.

Today, another bubble is ballooning but unlike those that have gone before it most investors, policymakers and analysts are well aware of its existence and the problems it could create.

Sales of high-yield debt – or, as they were once known, junk bonds – have exploded this year. In January alone, non-investment grade Asian companies, those whose debt is ranked by credit rating agencies as riskiest, sold just over $9bn (£6bn) of high-yield bonds, a year-on-year increase of more 6,000pc, according to figures from data provider Dealogic. In Europe, sales of high-yield debt is also running at record levels and nearly $30bn of bonds have been sold so far this year.

The massive increase so soon after a financial crisis that was caused in part by the credit meltdown has raised fears that less than five years on from the bankruptcy of Lehman Brothers and the near failure of Royal Bank of Scotland and HBOS, the world is setting itself up for another crash.

In large part, the explosion in demand for high-yield debt has been a direct consequence of the response of Western governments to the last crisis. Since Lehman’s collapse, some $12 trillion has been pumped into the global financial system by central banks across the world in an effort to prop up banks and maintain low interest rates.

The impact of this unprecedented monetary stimulus has been to create a potent mix of historically low yields on government bonds and rising inflation, forcing even the most conservative of investors to hunt for yield in an effort to preserve their capital and achieve a return.

“What you’ve basically seen is people who don’t really want to take more risk being forced up the risk curve to get the yield they need,” says one London-based bond trader.

However, the concern is that much of the money being pumped into high-yield debt is not only from speculators, but supposedly conservative institutions like pension funds and large insurers. The chief executive of one insurer admits privately to the problems faced in finding places to invest. “It’s a real problem. We have fixed liabilities and we have to get a certain return in order to meet them. A few years ago you could get the yield you needed from a triple-B issuer, but today to get the same return you are looking at double-B or lower,” he said.

So market conditions abroad are becoming increasingly high risk again because investors from speculators to pension funds and large insurers are being coerced into riskier investments to see any satisfactory return? In this case, with purchasing bad debt aka 'junk bonds'.

Worse it seems many investors are borrowing in order to 'leverage' their investments to build on those returns. So we see a tangled web of high debt and high risk investment, similar to conditions that underpinned the 2008 global financial crisis - though not due to real estate investment but in risky bonds.

So is 'the world is setting itself up for another crash'?

Many now investing there are caught up and have to take the risk to stay in the game. They stand to lose real money. Yet those in the banks have seen their losses covered by the poor tax payer, for them the game plays on, all but at a slower pace.

Some will see the NWO in all this but I don’t, I just see a game that has been played to great effect for many years and all involved have done well finding new ways to extract more, until the house of cards they built fell down.

I don’t see any way back either and I mean for the banks too.

Recessions are natural; there is no end to boom and bust as PM Gordon Brown so confidently claimed. Just as I can’t confidently predict that my finances will continually rise in volume, neither can HMG. But the double hit of the subprime markets and the continued collapse of the Euro is no recession. It is the fundamental end of the West as the dominant power. We have done nothing but lurch from disaster to disaster for five years in a row and your excellent post shows that the trend is continuing unabated.

Maybe the flight to the east is as inevitable as rats leaving a sinking ship.