{"id":27779,"date":"2017-11-09T06:51:59","date_gmt":"2017-11-09T11:51:59","guid":{"rendered":"http:\/\/olduvai.ca\/?p=27779"},"modified":"2017-11-09T06:51:59","modified_gmt":"2017-11-09T11:51:59","slug":"too-safe-to-fail-implied-default-rate-for-european-junk-bond-is-negative-1-1","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=27779","title":{"rendered":"Too Safe to Fail: Implied Default Rate for European Junk Bond is Negative 1.1%\u00a0"},"content":{"rendered":"
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Too Safe to Fail: Implied Default Rate for European Junk Bond is Negative 1.1%\u00a0<\/span><\/a><\/h3>\n<\/div>\n
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Apparently, European junk bonds are too safe to fail. Fundstrat Global Advisors\u2019 Thomas Lee says the market-implied default rate for a European junk bond sits at a negative 1.1%.<\/section>\n<\/div>\n<\/header>\n
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Please consider Investors Price European Junk Debt as Too Safe to Fail, Thanks to Funky Bond Math<\/a>.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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The market\u2019s expectation for an average European high-yield bond to default on its payments stood at negative 1.1% on Oct. 26, versus a long-term average of a positive 5.8%, according to an analysis released Friday by Thomas Lee, the head of research at Fundstrat Global Advisors, who attempted to demonstrate the pernicious consequences of quantitative easing.<\/p>\n

\u201cWe see this creating a \u2018moral hazard\u2019 which allows bad businesses to borrow money and misallocate. After all, wouldn\u2019t anyone want to borrow money at cost of debt less than the U.S. government?\u201d said Lee.<\/p>\n

But Martin Fridson, chief investment officer of Lehman Livian Fridson Advisors and a veteran high-yield bond analyst, has criticized the principal way money managers and market strategists like Lee calculate the market\u2019s expectations for the default rate, which uses the option-adjusted spread as a jumping-off point. By his own calculations, the default rate for an average European junk bond should be 0.2%, still a very low level.<\/p>\n

Fridson, nonetheless, conceded the ECB was one \u201croot cause\u201d for the seemingly stretched valuations seen in the market for European corporate paper.<\/p><\/blockquote>\n<\/div>\n<\/div>\n<\/div>\n

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Debate Over Risk<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Depending on your point of view, the implied default rate on European junk bonds is -1.1% or as high a 0.2%.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Also consider Tracking the Amazing Junk Bond Bubbles in the US and Europe<\/a>.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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One hell of an unwind is coming. I wish I could tell you when.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/article>\n","protected":false},"excerpt":{"rendered":"

Too Safe to Fail: Implied Default Rate for European Junk Bond is Negative 1.1%\u00a0 Apparently, European junk bonds are too safe to fail. Fundstrat Global Advisors\u2019 Thomas Lee says the market-implied default rate for a European junk bond sits at a negative 1.1%. Please consider Investors Price European Junk Debt as Too Safe to Fail, […]<\/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":[16937,402,14648,13390,558],"class_list":["post-27779","post","type-post","status-publish","format-standard","hentry","category-economics","tag-european-junk-bonds","tag-high-yield-bonds","tag-michael-shedlock","tag-mishtalk","tag-negative-interest-rates"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/27779","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=27779"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/27779\/revisions"}],"predecessor-version":[{"id":27780,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/27779\/revisions\/27780"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=27779"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=27779"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=27779"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}