2012: The year of the junk bond

The first quarter of 2012 will go down as the most active for junk bond issuance since 1980, when Thomson Reuters began keeping track, with 130 companies floating $75 billion in debt offerings.

Ben Bernanke is starting to get his way.  Matt Wirz writes for The Wall Street Journal that companies with junk credit ratings are bellying up to the debt trough like no other time in history.  The first quarter of 2012 will go down as the most active for junk bond issuance since 1980 when Thomson Reuters began keeping track, with 130 companies floating $75 billion in debt offerings.

Investors can’t get enough of that high-yield stuff, with banks and Treasuries paying just north of zero.   “The rally in junk bonds extends an advance that began in early 2009 and can be traced largely to the Federal Reserve’s policy of keeping benchmark interest rates near zero,” writes Wirz.

“It’s the only place I can find any yield whatsoever with a reasonable risk,” Lee Hevner, individual investor and first time junk bond buyer, told Wirz.  High-yield corporate borrowers paid an average rate of 7.98% on bonds they have sold this year, according to Thomson Reuters, the lowest since the junk-bond market was created in the 1980s.

The Fed’s rate stomping even has Wall Street looking at rental homes.  Warren Buffett, mastermind of Berkshire Hathaway, Inc. told a CNBC audience he would buy “a couple hundred thousand” single-family homes if he could given the high yields on rentals.

The Wall Street Journal’s Nick Timiraos, Robbie Whelan and Matt Phillips write:

Fannie Mae is looking to bulk sale 2,500 divided into eight regional pools.  The total current market value is $320 million.  If the sale goes well, Fannie and Freddie have plenty of inventory to sell.  Fannie Mae has 120,000 foreclosed properties. However, the buyers are lining up.

“A pretty robust cottage industry has developed and is absorbing this at an incredibly fast pace,” Richard Smith, chief executive of Realogy Corp., tells the WSJ.

Bernanke’s Fed has kept the rate it controls at just above zero for going on four years now.  And he has promised continued low, low interest rates until 2014.  Jim Grants told the New York branch of the Federal Reserve that holding rates stable is de-stabilizing.  While speculators know what to do with cheap money, the uninformed pay the price.

With 11 million underwater homes, the housing market has not come close to clearing the housing boom malinvestment.  Companies forced to pay high interest rates are being signaled by the market, not to take on more debt, but instead to de-lever.  All cheap refinancing does is mask poor management or a poor-quality product.  The Fed’s pushing of investors to higher risk allows enterprises that should be liquidated to continue wasting capital.

The Fed’s policy is squashing these market signals.   We now have malinvestment in malinvestments, making the eventual crash a catastrophic one.

Meanwhile, the average Joe is looking for some divine intervention in the form of winning the  Mega Millions lottery with a jackpot of at least $640 million and possibly much more the way people are lining up for tickets.  In Katy Texas convenience store manager Salim Turk said lottery ticket sales have been off the charts this week. The store sold more than $1,000 in tickets by 11 a.m. Friday. Sales on Thursday exceeded $3,500 and reached about $2,800 Wednesday. The typical jackpot only draws about $1,000 in sales a day, he said.

More than 1,000 people lined up and waited 4 hours to buy Mega Millions tickets at the Primm Valley Lotto Store on the California-Nevada border just south of Las Vegas.

It is unknown how many Mega Millions tickets Ben Bernanke has purchased.