The declining yields have created a potential for a “bond bubble” that could result in significant losses for debt investors, Fitch Ratings said in a Dec. 19 statement. Oaktree Capital Group LLC’s Howard Marks said in a Jan. 7 memo to clients that the “scramble for return has brought elements of pre-crisis behavior very much back to life.”
Portuguese Debt
Portugal, which is rated junk, sold 2.5 billion euros of five-year bonds through banks, the first offering of that maturity in almost two years. Spain, rated one level above junk by Moody’s Investors Service and S&P, saw demand for its Jan. 22 bond sale that was unmatched in the country’s history, Economy Minister Luis de Guindos said in Brussels that day.
Buyers of fixed-income products must be told that “just because it is a bond doesn’t mean that it trades at par,” Cohn said yesterday.
“At some point, interest rates will go higher again, and all of the money that has piled into fixed income over the past three years, some of it will come out,” Cohn said. “We will clearly be there to facilitate, we will clearly be there to provide balance sheet and liquidity to our clients, but ultimately, we can’t be the buyer of last resort.”
Cutting Assets
The 13 largest investment banks have announced plans to cut $1.03 trillion in risk-weighted assets, consulting firm McKinsey & Co. said in a Jan. 23 report. Inventory holdings of corporate bonds by top dealers have dropped about 40 percent from two years ago and are less than a quarter of their 2007 peak, according to data compiled by Bloomberg.
“A lot of the banks have a new plan of de-risking their balance sheets, getting their risk-weighted assets down to try to improve their equity ratios,” Cohn said. “And I’m not sure that that capital can come back into the market quick enough” if there’s a sell-off, he said.