Bond analysts are warning that covenants on the junk bond market are weaker than ever. Even a Fed governor is warning about the richness of the market.
All the while, the Fed’s targeted low interest rates keep the incentives going for buying leveraged debt.
There are few other places to find the fixed income returns that needy investors seek.
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One analyst said that the deals currently being made are becoming laughable and if things are no different six months from now, they will be stupid.
Approximately $506 billion worth of debt is trading above redemption price. Even in other areas of the debt market, the cost of protecting corporate debt from default is rising.
The Markit CDX North American Investment Grade Index is used to hedge against losses or to speculate on creditworthiness of debt issued.
When investor confidence erodes, the index rises; when confidence rises, the index falls. The index rose .6 basis point yesterday in New York.
The US two-year interest rate spread also rose .47 basis point yesterday in New York. When investors flock to government bonds for safety, the gauge widens; when investors favor corporate debentures, it narrows.
Analysts say the junk bond market is as overbought as they have ever seen it. Investors in 2012 bought $100 billion in debt that did not restrict borrowers’ debt to earnings or interest expense.
The richness of the market may be the first signal of danger
in the Fed’s monetary easing policies. Some analysts are uncertain if the economy is capable of responding adequately to the Fed’s quantitative easings in the effort to bring down the unemployment rate.