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Friday, July 27, 2007

Bond Risk Soars by Record as Investors Flee Corporate Debt

This is what things look like when a credit bubble BEGINS to deflate:

" The risk of owning corporate bonds increased by the most ever in Europe and Asia on concern banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts, according to credit-default swap traders.

A sell-off in the U.S., Asia and emerging markets extended to Europe, where the cost to protect company debt approached the record high in 2005 when General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings. Deutsche Bank AG's risk premium jumped to five times the amount on June 1.

Investor wariness caused more than 40 companies worldwide to reorganize or abandon borrowing plans in the past month. The retreat forced banks to take on $20 billion of LBO loans they had planned to sell for Kohlberg Kravis Roberts & Co. and Cerberus Capital Management LP this week.

"The big risk in the coming weeks and months is that you get forced selling of credit with institutions, both from the hedge fund side and the bank side,'' said Bob Janjuah, chief credit strategist at Royal Bank of Scotland Group Plc in London. "The global economy is a debt-fueled confidence based scheme. All assets are and will be impacted.'' "

The last sentence is very important: " THE GLOBAL ECONOMY IS A DEBT-FUELED CONFIDENCE BASED SCHEME. " The key word here is CONFIDENCE. That level of confidence is moving from 'we are invincible' and 'this time its different' to something more realistic. Watch the Yen to verify the extent of the global de-levering through the Yen carry trade unwind.

Source: Bond Risk Soars by Record as Investors Flee Corporate Debt (


bruce said...

Does anyone know what the situation would be for obtaining corporate surety bonds bonds as a sole-trader who has a poor credit history. I have looked into companies who offer bad credit surety bonds but I need to secure the bond against the performance of my business to my clients. To be honest I don't really understand all of the jargon as I am a new business owner who has never had to deal with this kind of thing before - but was informed by a relative that it's something I need to sort out. I don't really want to ask them since my finances are something I like to keep private.

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