The search for yield may be ending in the corporate bond market as risk premiums have moved to the highest levels this year. Both high grade and high yield bonds have sold-off even with the current Treasury rally. The risk-off trade is present with credit sensitive products. Money is flowing back to safe assets.
Short-term Treasuries are at extreme lows. The sovereign risk problems are carrying over to corporate bonds. First all risk premiums are increasing. Funds are moving to save short-term assets. Second, the threat of a global slowdown is having a negative effect on spreads. Third, money available for risky lending is starting to slow. Capital will be needed so funds will not be available from banks for corporate borrowers.
This is a new version of the Lehman crisis. Liquidity is starting to dry-up. The markets need a solution to the Greek crisis even if it is a default. The is will reduce the current market uncertainty.
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