{"id":17726,"date":"2016-02-13T11:21:33","date_gmt":"2016-02-13T16:21:33","guid":{"rendered":"http:\/\/olduvai.ca\/?p=17726"},"modified":"2016-02-13T11:21:51","modified_gmt":"2016-02-13T16:21:51","slug":"this-is-how-financial-chaos-begins","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=17726","title":{"rendered":"This is How Financial Chaos Begins"},"content":{"rendered":"<header>\n<h3 class=\"entry-title\"><a href=\"http:\/\/wolfstreet.com\/2016\/02\/12\/how-financial-chaos-begins\/\" target=\"_blank\">This is How Financial Chaos Begins<\/a><\/h3>\n<p class=\"entry-meta\"><strong>It\u2019s not contained.<\/strong><\/p>\n<\/header>\n<div class=\"entry-content\">\n<p>There are over $1.8 trillion of US junk bonds outstanding. It\u2019s the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was \u201ccontained.\u201d<\/p>\n<p>Yet\u00a0contagion has spread from energy, metals, and mining to other industries and up the scale. According to UBS, about $1 trillion of these junk bonds are now \u201cstressed\u201d or \u201cdistressed.\u201d And the entire corporate bond market, which is far larger than the stock market, is getting antsy.<\/p>\n<p>The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy,\u00a0<a href=\"http:\/\/wolfstreet.com\/2016\/02\/04\/ccc-rated-junk-bond-yields-hit-20-blow-past-lehman-moment-consensual-hallucination-wanes\/\" target=\"_blank\">as we pointed out<\/a>. Today, that average yield is\u00a0nearly\u00a022%!<\/p>\n<p>Today\u00a0even the average yield\u00a0<em>spread<\/em>\u00a0between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-21441 size-full\" src=\"http:\/\/wolfstreet.com\/wp-content\/uploads\/2016\/02\/US-Junk-bond-spreads-CCC-2008_2016-02-11.png\" sizes=\"auto, (max-width: 477px) 100vw, 477px\" srcset=\"http:\/\/wolfstreet.com\/wp-content\/uploads\/2016\/02\/US-Junk-bond-spreads-CCC-2008_2016-02-11-260x232.png 260x, http:\/\/wolfstreet.com\/wp-content\/uploads\/2016\/02\/US-Junk-bond-spreads-CCC-2008_2016-02-11-160x143.png 160x, http:\/\/wolfstreet.com\/wp-content\/uploads\/2016\/02\/US-Junk-bond-spreads-CCC-2008_2016-02-11.png 477x\" alt=\"US-Junk-bond-spreads-CCC-2008_2016-02-11\" width=\"477\" height=\"426\" \/><\/p>\n<p>At this cost of capital, companies can no longer borrow. Since they\u2019re cash-flow negative, they\u2019ll run out of liquidity sooner or later. When that happens, defaults jump, which blows out spreads even further, which is what happened during the Financial Crisis. The market seizes. Financial chaos ensues.<\/p>\n<p>It didn\u2019t help that Standard &amp; Poor\u2019s just went on a \u201cdown-grade binge,\u201d as S&amp;P Capital IQ LCD called it, hammering 25 energy companies deeper into junk, 11 of them into the \u201csubstantial-risk\u201d category of CCC+ or below.<\/p>\n<p>Back in the summer of 2014, during the peak of the wild credit bubble beautifully conjured up by the Fed, companies in this category had no problems issuing new debt in order to service existing debt, fill cash-flow holes, blow it on special dividends to their private-equity owners, and what not. The average yield of CCC or lower rated bonds at the time was around 8%.<\/p>\n<p>&#8230;click on the above link to read the rest of the article&#8230;<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>This is How Financial Chaos Begins It\u2019s not contained. There are over $1.8 trillion of US junk bonds outstanding. It\u2019s the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was \u201ccontained.\u201d Yet\u00a0contagion has spread from energy, [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[12362,9859,12361,1297,8984,4254,4255],"class_list":["post-17726","post","type-post","status-publish","format-standard","hentry","category-economics","tag-contained","tag-financial-chaos","tag-junk-bond-yields","tag-junk-bonds","tag-lehman-bankruptcy","tag-wolf-richter","tag-wolfstreet"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/17726","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=17726"}],"version-history":[{"count":2,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/17726\/revisions"}],"predecessor-version":[{"id":17728,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/17726\/revisions\/17728"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=17726"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=17726"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=17726"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}