Time to call an end to the blogging sabbatical. Let’s start with a look at what the flood of cash from central banks is creating.
Today’s lesson comes courtesy of Ambrose Evans-Pritchard, who notes that the corporate bond market is on fire.
“The credit market’s on fire,” said Suki Mann at Societe Generale. “We have seen a massive grab for yield. The mood is so good that even if Greece were to default it would probably make no difference.”
The average borrowing cost for high-grade US companies has dropped to 3.52pc, just shy of all-time lows. American firms took advantage of the hunt for safe yield to raise $70bn (£44bn) last week alone, led by McDonald’s and IBM.
The recovery in Europe has been electric since the European Central Bank (ECB) opened the floodgates in December, lending banks €489bn (£410bn) at 1pc for three years, with more to come later this month.
Europe saw the biggest one-month compression in high-grade debt yields in January since records began, excluding the V-shaped rebound after the 2008 crash. Telecom Italia’s yields have dropped 180 basis points this year.
“The ECB was the game-changer. A lot of this money seems to have gone into corporate bonds and it makes sense because non-financial corporates are the strongest in history with big cash reserves and very defensive balance sheets,” he said.
There is little arguing with the point that high grade corporate credit is probably as strong as it’s ever been. Cash reserves are substantial and profits robust. Still, one has to at least raise an eyebrow when P&G is paying 2.1% for five year money while GE is clocking in at 2.24%. Yes, that same GE that had to tap TARP funds just a couple of years ago to stay afloat.
Somehow, this all seems just a bit too good to be true. Something like house prices that never quit rising, or technology stocks which seemed immune to the laws of physics. Central bank bubbles are beginning to appear to be the true “New Normal” of the 21st Century.
Evans-Pritchard does note one casualty of the central bank largesse — senior creditors of banks. As he notes, the willingness of the ECB to accept any and all collateral means that European banks (American as well?) are cleaning the closets and pledging just about anything that isn’t infested with maggots in order to draw down cheap ECB loans. If the deluge arrives those creditors are going to find little left to satisfy their claims.
Aside from the banks,there’s probably little to worry about here. After a couple of bubbles, we’re all saner, more sober and wiser, and readily able to see froth when it appears. Aren’t we?
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