junk bonds

Yields Reach New Highs: When Will They Go Down?

    The 10 year Treasury yield hit 2.96% today, a new four year high. If it exceeds 3.25% that may be a sign of a bear market in bonds. Typically inflation rate changes determine bond yields. However there maybe time lags. Interest rates are based on the market’s forecast of future inflation but the CPI is based on what happened in the past. The result is the final year of a cycle is when inflation goes through a blow off top formation and then suddenly crashes. During the upward movement of the blow off it looks like a trend is being established, but it was only transitory.     During the era before globalization, before 1980, employers were trapped in the

2018-04-22T21:20:06+00:00April 20th, 2018|mayflowercapital blog|Comments Off on Yields Reach New Highs: When Will They Go Down?

Do “Check the Box” Techniques Result in Greater Risk?

   There is a risk that gatekeepers will evaluate economic data (including risks) with a simple, unverified, or naively “verified” “check the box” questionnaire (where questions may be answered with superficial forced use of simple yes or no answers) which would lead to an eventual failure to screen out misunderstood data leading to bad decision making criteria. For example, the BLS calculates unemployment by counting nominally “employed” people who may merely have a gig economy temp job with unsustainable, unreliable income or a tippable job with a $2.07 an hour minimum wage. An example of  “check the box” questionnaire verification is a bank doing Easy Qualifier loans before 2008 would simply ask the loan agent “Did you verify the income?”

2018-04-19T12:41:08+00:00April 19th, 2018|mayflowercapital blog|Comments Off on Do “Check the Box” Techniques Result in Greater Risk?

Yield Curve Inversion Coming Soon

    Increasingly more articles have been written by various people saying that the bond market’s yield curve (where yields are placed on a chart in a curved pattern) is the best predictor of recessions when it inverts and that it is getting close to inverting. It may be as little as a 0.50% rate increase could tip it over into an inversion where short term rates are higher than long term rates. The difference (spread) between the 2 year and 10 year Treasury Note is 0.44%.     The next Fed meeting is May 1 – 2, followed by June 12 – 13. So Wednesday, June 13 the yield curve could be inverted, tipping over the economy into recession, assuming they

2018-04-17T16:08:25+00:00April 17th, 2018|mayflowercapital blog|Comments Off on Yield Curve Inversion Coming Soon

Is Preferred Stock a Good Bond-Like Investment?

Some people like preferred stock, which is similar to a bond and has higher yields. My reaction is that any bond-like thing with high yields is like a junk bond and could seriously damage a portfolio during a recession. An ETF of preferred stocks has about half of its assets in the banking industry. This is extremely risky because banks are levered about 12 to 1 and thus have a ratio of 92% debt and 8% equity. If a small amount of the bank’s loans fail then the stockholders and later the preferred shareholders will suffer the loss. In the great banking crash of 2008 some bank preferred stock received support from the government but generally it has been government

2016-06-20T16:08:18+00:00June 20th, 2016|mayflowercapital blog|Comments Off on Is Preferred Stock a Good Bond-Like Investment?

More Cracks In The Junk Credit Market

Today the president of a P2P online lender and two other employees mysteriously and suddenly resigned. It was alleged that loans that the company sold to investors had something improper. The company had to buy back those loans and sell them to some other investor. I have been writing for a long time that P2P and BDC lenders are too risky. These lenders claim that there is a new era of online lending that enables them to find creditworthy borrowers that banks can’t find but that is a ridiculous theory. Banks can do anything that these online lenders do, if the underwriting is sound. These lenders simply recruit shaky “B” paper borrowers and play dumb when they “underwrite” the loan

2017-01-10T23:33:01+00:00May 9th, 2016|mayflowercapital blog|Comments Off on More Cracks In The Junk Credit Market

How Will Puerto Rico’s Debt Problem Affect Systemic Risk?

Puerto Rico will default on a large bond payment due May 2. How will the markets react? The hedge fund industry owns a very large portion of Puerto Rico’s bonds, doesn’t want a default, and is hoping that somehow the commonwealth can simply borrow more to have the cash to make scheduled payments. That is irrational since there is no way the island can afford its existing debts. Congress is working on passing a bill that would allow the commonwealth to use the bankruptcy courts to cut the debt balance. This is the humane thing to do and is the island’s only hope. Voluntary negotiations with creditors to ask for a cut in debt balances won’t work since some creditors

2016-04-22T14:39:43+00:00April 22nd, 2016|mayflowercapital blog|Comments Off on How Will Puerto Rico’s Debt Problem Affect Systemic Risk?

When Will The Recession Occur?

The average economic recovery lasted 66 months over the past 50 years. Recoveries were of shorter duration before that, however, I prefer to use the most recent 50 years because it is more relevant. The current recovery is 82 months old. The recoveries in the past 50 years that lasted longer were 1991, which lasted 119 months, and 1982, which lasted 91 months. Both of those were due to rare, exceptionally favorable circumstances including the Reagan tax cuts, the end of the Cold War and the huge opening of low cost EM labor markets in the former communist areas. The good times in 1982-2000 correlated with significantly lower debt to GDP loads than today’s debts. Some people claim that the

2016-04-11T12:18:11+00:00April 11th, 2016|mayflowercapital blog|Comments Off on When Will The Recession Occur?

Rising Risk of Big Muni Bond Default

As the economy moves closer to the top of the credit cycle and a subsequent stock crash and recession bond investors should be aware to avoid being fooled by hidden risks in bonds. Traditionally Muni bonds were low risk and had a track record, except for a few tiny cities, of not defaulting. But Puerto Rico is deeply in debt. News stories have said the territory may seek a 46% haircut plus several years of no interest (which would really be more like a 55% haircut. There are many news stories about Chicago public schools having more debt than they can afford. It was a shock when Lehman failed and creditors were paid a small amount. When Argentina defaulted in

2017-01-10T23:33:03+00:00February 2nd, 2016|mayflowercapital blog|Comments Off on Rising Risk of Big Muni Bond Default

Junk Credit Markets Have Already Crashed: Recession Coming

Junk bonds and similar subprime financing devices like BDC and P2P lending are what will fail and soon cause a recession. About a year ago the news media ran articles saying not to worry because the interest coverage ratio was roughly a fifth better than at the top of 1989 junk bond bubble. But interest rates were much higher then, so that implies if rates were (hypothetically) the same in both eras then about a year ago junk bonds would have reached a peak similar to the 1989 top. The news reports of a year ago need to be revised to reflect the serious deterioration in debt service ratios for energy companies and how that affects other allied industries like

2017-01-10T23:33:05+00:00December 22nd, 2015|mayflowercapital blog|Comments Off on Junk Credit Markets Have Already Crashed: Recession Coming

Today’s Bond Market Turbulence

Today junk bonds declined 0.87% in price and the 20 year Treasury ETF TLT declined 1.3% in price. Usually if junk bonds decline then Treasuries go up, so this was rare situation. Probably investment grade rates rose out of fear of the Federal Reserve’s likely rate increase to be announced on December 16, 2015. Junk bonds had already declined a lot last week after Third Ave. Focused Credit Fund mutual fund announced a freeze of redemptions.  I expect that the Fed may still go ahead with the rate increase just so they can claim they were prudent in fighting inflation. But eventually the rising amount of evidence of a growing global economic weakness will probably result in the rate increase

2017-01-10T23:33:10+00:00December 14th, 2015|mayflowercapital blog|Comments Off on Today’s Bond Market Turbulence