☀️☕️ Grabbing Junk Bonds

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📝 Focus

• Grabbing Junk Bonds

📊 In the Markets

• “Uninvestable” China’s Great Wall of Worry; Japanese earn less; Americans spend; Sports streaming; WeWork’s back?

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📝 Focus

Grabbing Junk Bonds

The US corporate bond market is on track for record-breaking issuance, buoyed by booming investor demand for bonds ahead of lower interest rates. Corporate debt offers good yields plus the prospect of lower default risk in an anticipated economic "soft landing." January saw a record $196 billion in investment-grade (IG) bond issues. (MFM: Bonding Time)

But the expectation of falling rates and a soft landing means those bonds are now being issued at almost no premium (spread) over what Treasuries yield, which opens the door for riskier issuers to also get funded. High yield (HY or “junk”) bonds saw new issues surge to over $31 billion in January, the highest since Nov-21. 

Bond ETFs have started to reflect this dynamic, too. The last week of January saw an outflow from IG-focused funds and ETFs of $1.7bn (from a $3.3bn inflow the previous week), while those investing in HY saw inflows jump to $2.4bn (from $0.4bn) according to EPFR Global data.

..... ▷ January also saw a historic high in sovereign debt sales from developing nations, plumbing similar investor demand to lock in yields heading into a peaking of global rates, with $47 billion of issues led by major and less risky emerging markets. 

Besides the narrowing of current account deficits over the past year, developing country economies tend to benefit as a whole from a weaker US dollar. 

..... ▷ However, dedicated emerging market debt funds have seen an outflow of $1.6 billion this year, a continuation of several years of outflows.

This contrasts with emerging market equity funds, which have seen massive inflows (though largely led by demand for exposure to shares in China… even though investment “experts” were labelling the market “uninvestable.”) 

And that could mean limited demand for smaller and riskier emerging market sovereign bond issuers.

Cover Image: Map of Emerging Markets - Wikimedia

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📊 In the Markets

China and Hong Kong stocks surged on Tuesday, while most other Asia-Pacific markets dropped, tracking weak overnight markets.

The CSI 300 index closed 3.5% higher, and Hong Kong’s Hang Seng index rose 4% in a violent bounce from recent multi-year lows. (MFM: “Uninvestable” China?)

The China Securities and Regulatory Commission said that it would prohibit securities lending and short selling and aim to punish “malicious” short selling. The CSRC would also push institutional investors to “enter the market with greater efforts” and hold A-shares for a longer period of time. Earlier, Central Huijin, an arm of China’s sovereign wealth fund, announced that it would expand its purchases of exchange-traded funds.

A confidence-boosting effort by trying to put a floor under the “falling knife” markets, to some extent, but still not (yet) the bazooka package of macroeconomic stimulus measures and reforms (and a lasting solution for the real estate crisis) that some investors want and underweight fund managers fear. 

Or will markets climb the Great Wall of Worry🎓 anyway?

Meanwhile, Japan's Topix fell 0.7% as household spending dropped more than expected in December, with a 2.5% decline year on year. 

Average monthly household income in Japan fell by 4.4% in nominal terms, i.e. the actual amount of Yen taken home, and 7.2% in real terms (purchasing power, which is worse thanks to inflation) from the previous year, suggesting that the Bank of Japan's ultra-loose monetary policy will continue for some time since sustainable wage increases are among the central bank’s targets.

On Wall Street, tech bounced from an early selloff, though the sector was still down for the day. The S&P 500 closed Tuesday 0.2% higher, with the tech-heavy Nasdaq Composite just barely in the black. 

Treasuries rallied after the previous day’s sharp drop, pushing 10-year and 2-year Treasury yields down by 0.07 percentage points each to 4.09% and 4.4%.

Americans just gotta keep spending. Total household debt in the US climbed to another record high last year. More and more consumers are struggling to pay down credit card balances and auto loans, signalling “increased financial stress” that is especially bad among younger and lower-income households, according to the New York Fed.

Sports programming competitors ESPN (owned by Disney), Fox and Max (Warner Bros. Discovery) plan to launch a joint sports streaming service later in the year, according to CNBC, to counter the shift in viewership away from traditional cable TV. It can be a standalone or bundled with the parent companies’ own streaming services like Disney+.

The value of sports media rights is shooting up while live sports content continues to be a major draw for audiences. Netflix (having found success with sports-related docuseries-es) is also aiming to introduce more sports programming.

Meanwhile, Snap plunged 32% in after-hours trading after a 4% up day on revenues that were below analysts’ best guesses and a weaker-than-expected forecast. The company blamed some of the weakness on the war in the Middle East, which erupted last October.

And in a bizarre turn, ousted WeWork co-founder and CEO Adam Neumann is seeking to buy the firm that lost billions under him out of bankruptcy. Neumann, who received a payout of $445 million in his exit package, claims to be “partnering” with Third Point in the audacious bid. (MFM: WeBankrupt.)