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The alarm bell is ringing, but isn’t it strange that no one can hear it? The world is anxious for optimism. Witness the joy of a teenage Englishman Winner of the US Open Or interest in MET Gala, Was published on the top page of major newspapers including this.
Even in the financial markets, the gauge that many US citizens see as a barometer of our economic well-being, the $ 51 trillion US stock market, set a record. After recording.. Still, there are good reasons to worry.
If the ever-growing chorus of analysts on Wall Street should be believed, and if there is a compelling argument that they should be, the risk in one corner of the financial markets is beginning to increase.
Investors shook transactions after high-risk transactions this year to find a place to deposit cash. According to Sifma, an industry association in the securities industry, lending is huge and the US corporate bond market has grown to nearly $ 11 trillion. This is more than a tenth the size of the end of 2019 before the Covid-19 pandemic. However, the conditions under which these money managers agreed to lend were surprisingly poor.
Credit rating agency Already warned Seeds of the next crisis, or at least the next default cycle, are sown today. The pain is especially severe in the junk bond and leveraged drone market. This is where high-risk companies raise their own money and private equity buyout shops raise their acquisitions.
Analysts at credit rating provider S & P Global this month warned that the increased risk in this market means investors need to demand more appropriate compensation to lend to it. However, analysts have found that “the opposite is now true.”
As just one example, Coinbase, a junk rate cryptocurrency exchange that appeared on the regulatory crosshairs, was released this week. 10-year bond At an interest rate of only 3.625%. The US government paid less than 0.5 percentage points under it to borrow by 2018.
At this week’s meeting, Avenue Capital Management CEO Mark Rasley took over “hundreds of transactions” with the view that many borrowers will run into problems over the next few years. He said he was.
“There are a lot of knuckle heads out there and many people are making big mistakes,” he said. These knuckle heads agree to weaken their protection as they are willing to lend if boosted by many other investors. Higher stock prices and lower borrowing costs have made the US financial situation easier and looser than ever, according to Goldman Sachs’ indicators dating back to 1982.
Rating agency Moody’s analysts said this week that private equity funds, large users of the junk bond and leveraged loan markets, are paying large dividends to recoup the money they spent on acquisitions due to lack of investor safeguards. Estimated to be prompted to pay.
And private equity Was certainly active.. Leveraged buyout activities have already reached record highs, surpassing 2007 records, according to Refinitiv.
There is a problem there. Moody’s own performance analysis during the pandemic showed that private equity-backed groups often defaulted more than average high-yield bonds. Excluding the oil and gas sector, 5.2% of US junk rating agencies defaulted between 2020 and 2021. For private equity-owned companies, that figure was 8.4%.
So why lend at such a low interest rate when investors know how the default cycle will eventually run? In the next paper from the Journal of Portfolio Management, Professor Edward Altman of New York University and Lecturer Mike Harmon of Stanford University argue that investors are lending based on “aggressive and very optimistic” expectations. increase.
“By undertaking a series of possible outcomes at the end of the bullish probability curve, investors appear to be betting very asymmetrically on the downside,” they write.
Simply put, in the coming years, these investors may be left behind in hindfoot nursing losses. During the financial crisis, large credit portfolio price cuts hit Wall Street banks. But now, most of its loans are made by pensions, funds, and credit funds on behalf of regular mom and pop investors. The system may not collapse, but it can hurt your retirement account.
Worry about the risks when the financial world looks so rosy Fund manager taking it Money from the table In search of a safer bet.
It may not be a glorious approach in the short term—especially if the returns from lending to a low-rated group look very attractive compared to other offers. But if you learn anything from Met’s red carpet this week, it means that not all bets will pay off.
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