Bank Leverage

The average ratio of tangible assets to tangible equity for the six-biggest U.S. banks, a measure of leverage, dropped to 12.8 in June from 27.5 at the end of 2007, Bloomberg data show.

When investors pull money for illogical reasons, “it’s as if we’re sitting at a poker table and a drunk businessman walks into the casino and sits at our table,” Steve Kuhn, whose Pine River Fixed Income Fund was the second-best performing hedge fund last year, said in a Bloomberg Television interview on Oct. 3. “That’s a good day for you, when people are making decisions for less than logical reasons, and you can sit there and calmly try to decide what true value is.”

While excesses in the market aren’t as troubling as they were before the financial crisis, “we’re going in that direction,” Oaktree Capital Management LP Chairman Howard Marks said in a Bloomberg Television interview on Sept. 7.

If Treasury yields rise high enough, people will rotate into the government debt and safer securities as they “wouldn’t have to take the pain of investing in low-quality instruments,” he said.

Yields on 10-year Treasuries rose as high as 2.99 percent on Sept. 5 from a record low of 1.38 percent on July 24, 2012. They’ve dropped to 2.65 percent after the Fed surprised investors on Sept. 18 by maintaining its monthly purchases.

The central bank will now take the first step in reducing its bond purchases in December, according to 59 percent of 41 economists in a Sept. 18-19 Bloomberg survey.

“The biggest potential threat is liquidity,” Joseph Engelhard, a former Treasury Department official who is now senior vice president at Capital Alpha Partners LLC in Washington, said in a telephone interview. “If all the hedge funds try to get out, who’s going to be buying?”

Elsewhere in credit markets, Neiman Marcus Group Inc. is planning to sell $1.56 billion of debt to help finance the luxury retailer’s buyout by Ares Management LLC and the Canada Pension Plan Investment Board. The cost to protect against losses on corporate bonds in the U.S. and Europe rose as U.S. lawmakers remained deadlocked on extending the nation’s debt limit to avoid a default by the world’s largest borrower.

Global Spreads

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, climbed 1.3 basis points to 80.9 basis points as of 12:10 p.m. in New York, according to prices compiled by Bloomberg.