The Daily Prophet: Junk Bond Apocalypse Put on Hold for One Day

Connecting the dots in global markets.

Last week, junk bonds had their worst run since March, with the Bloomberg Barclays US Corporate High Yield Index dropping 0.77 percent. The market was so unsettled that some borrowers even decided to postpone plans to sell bonds as investors pulled $2.2 billion from global exchange-traded funds that track the debt. So, you could almost hear the market letting out a sigh of relief Monday as conditions returned to what could be described as business as usual.

Rather than fulfilling some of the worst fears of investors at the end of last week -- that we could be witnessing the start of a painful selloff that weighs on riskier assets in general such as equities and emerging markets -- the environment Monday was rather upbeat. In fact, Bloomberg News' Gowri Gurumurthy reports that borrowers announced plans to sell almost $2.5 billion of junk bonds as the day got going, up from $1.6 billion a week earlier. For all the concerns, the environment is pretty favorable for junk bonds. The economy is growing with no signs of an imminent recession, interest rates aren't in jeopardy of suddenly shooting higher without notice and defaults are near historical lows. Moody's Investors Service says the U.S. corporate default rate fell from 3.8 percent at midyear to 3.3 percent in September, and is headed to 2.3 percent next year.

The firm's Liquidity-Stress Indicator is near an all-time low of 2.3 percent, indicating that borrowers have plenty of access to capital if needed. About the only thing investors can complain about are yields and spreads being too tight and not compensating them for risks inherent in holding such risky debt. “With spreads tighter, the chance that investors earn their coupon is certainly lower than what it was a year or two ago,” Eric Stein, co-director of global income at Eaton Vance Corp., said in an interview with Bloomberg TV. “If we have an inflationary world with higher rates, or risk-off and deflationary world, that could be challenging for high-yield.”

Although junk bond investors may be a suffering a bit of doubt, at least OPEC is confident about the economic outlook. The Organization of Petroleum Exporting Countries raised estimates for the amount it will need to pump to meet demand next year by 400,000 barrels a day to 33.4 million a day, according to a monthly report from the group. As that’s about 670,000 a day more than the cartel produced in the third quarter, global inventories would diminish further in 2018 if the group and its allies continue to keep supplies restrained, according to Bloomberg News' Grant Smith. Even with the increased production estimate, oil futures traded in New York held at about $57 a barrel, up from the low this year of about $42 in June. "With OPEC raising estimates, there’s an expectation that the market’s a lot tighter," said Phil Flynn, senior market analyst at Price Futures Group, told Bloomberg News. "We’ve gone from mentality of glut, glut, glut, to more rebalancing." OPEC Secretary-General Mohammad Barkindo described the production curbs as the “only viable option” to rebalance a global market still contending with excess supply, according to Bloomberg News' Meenal Vamburkar.

Who needs bitcoin when you have marijuana producers? Stocks related to cannabis are taking off just as the cryptocurrency suffers a bit of a pause following its year-long rally. The North American Marijuana Index is up 34 percent since Oct. 27 and 49 percent since the end of August. Optimism over the future of legalized cannabis seems to be growing almost every day. Democrat Phil Murphy, who last week was elected Governor of New Jersey, has vowed to legalize recreational pot statewide. Bloomberg News' Jen Skerritt reports that in Canada, Aurora Cannabis jumped as much as 24 percent Monday and is now up more than 80 percent this month, fueled by rising revenue and speculation it can secure a strong market position in Quebec’s legalized cannabis market. Aurora’s weed-growing facility in the province received a cultivation license, putting it in a favorable position, said Chris Damas, the editor of the BCMI Report in Barrie, Ontario. Companies identified with recreational marijuana, as opposed to medical pot, are surging the most amid speculation they’ll get investment from alcoholic-beverage companies, Damas said. Corona beer seller Constellation Brands just agreed to buy a minority stake in Canopy, the first major foray by an alcohol company into Canada’s nascent weed industry.

The rand, already the worst performing since June of 31 major currencies tracked by Bloomberg, is struggling to find a bottom, slumping Monday to its weakest level in 12 months. The rand is widely watched as a proxy for emerging markets because trading in the currency is active. Traders are on the defensive amid speculation that President Jacob Zuma is preparing to override the budget tabled in October by Finance Minister Malusi Gigaba to pay for his plan for free university education, according to Bloomberg News' Colleen Goko. The head of South Africa’s budget office, Michael Sachs, resigned after Zuma’s office ordered the National Treasury to find additional money to fund a plan for free university education next year, Business Day newspaper reported. Just how much South Africa’s widening budget deficit is going to cost will be revealed Tuesday when the nation holds its biggest auction yet of local-currency debt, according to Bloomberg News' Robert Brand. Gigaba said the government will need to raise 122 billion rand ($8.4 billion) of debt over the next three years to plug a shortfall. That means increasing the amount of notes offered at the weekly fixed-rate auction to 3.3 billion rand going forward from 2.65 billion rand previously.


The gold bugs haven't had a lot to do lately. The precious metal has fluctuated in a range of just 3.3 percent for more than a month, the least over any comparable period since February 2013, according to Bloomberg News' Eddie van der Walt and Ranjeetha Pakiam. But at least one big investor is betting on a breakout in gold prices to the upside. Billionaire hedge fund manager Ray Dalio didn’t just recommend gold last quarter. He bought a lot of it. Bloomberg News' Luzi Ann Javier reports that as of the end of September, Dalio’s Bridgewater Associates, the world’s largest hedge fund, had boosted its holdings in SPDR Gold Shares almost seven-fold, and more than tripled its stake on iShares Gold Trust, a regulatory filing showed Monday. In August, Dalio recommended investors consider placing 5 percent to 10 percent of their assets in gold, citing political and economic risks. Bridgewater added 3.32 million shares in SPDR Gold in the third quarter, taking holdings to 3.89 million, a regulatory filing showed Monday. Bridgewater also boosted its stake in iShares Gold by 8.2 million shares to 11.3 million, according to the filing.

Frankfurt becomes the center of the central bank universe Tuesday, when Federal Reserve Chair Janet Yellen, European Central Bank President Mario Draghi, Bank of Japan Governor Haruhiko Kuroda and Bank of England Governor Mark Carney take part in a panel discussion on communication. The issue of central bank communication has been surprisingly contentious in the wake of the financial crisis. That's when central bankers decided to become more open with their policy intent, instituting what has become known as forward guidance. Critics say such openness has prevented central banks from acting more forcefully, and has contributed to the lack of volatility and rising investor complacency in almost all financial markets. After all, investors now know what central banks will do and when they will do it far in advance. 


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