GFC subprime on steroids – history repeating?
As a follow on from yesterday’s news there appear growing concerns about the high yield bond market and where this could end up after a rate hike tomorrow. The new buz word is ‘gating’ which, as we pointed out yesterday is when a mutual fund (or similar) simply stops liquidations in a distressed fund, locking out investors accessing their money in a falling market and truly exemplifying ‘counterparty risk’. When we say falling market, check out the chart below which shows that the high yield bond market just hit a low not seen since the GFC.
These mutual funds that capitalised on the central-bank-forced search for yield have literally doubled the amount of junk debt they hold since the GFC, now accounting for 27% of all global high yield debt (according to the IMF). As oil slid below $35/barrel for the first time since the 2009 post GFC slump last night the focus sharpens on all the energy sector junk debt sitting out there.
In the US alone, companies have spent nearly $5.5 trillion on exploration, drilling and infrastructure – all largely financed by these very same bonds. For very important context, in 2007 the total property subprime debt totalled about $1 trillion. Falling property prices triggered over 20% losses and the ensuing GFC that almost brought down the global financial system.
Consider that $5.5 trillion in energy was established when the price of oil was double to triple what we are seeing now. For those mathematically challenged, that is ‘considerably’ more than 20%....
For further context, the only thing that saved the global financial system from completely imploding during the GFC was the massive liquidity injection from central banks around the world. Consider that tomorrow the US Federal Reserve (the US central bank) is most likely going to increase rates and hence reduce liquidity in the market. What could possibly go wrong….?