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This is just the beginning, a new trend that may well turn into the next
craze. ECB President Mario Draghi, in his infinite wisdom, asked for it: he’d
driven the ECB deposit rate deeper into the negative, to -0.2%, and has
promised to buy €60 billion of assets a month, including Eurozone government
debt, other debt, and even, as German politician Frank Schäffler had
predicted so poignantly in July 2012, “old bicycles.”
The ECB would buy this debt from its favorite banks, driving up the price
so high that the yield would drop to -0.2%, same as the deposit rate. These
banks are going to make a killing on the deal. And yields of Eurozone
government debt have been plunging, with the German 10-year yield now at
0.15% on its way to -0.2%.
The goal: Make investors pay for the privilege of funding
all governments across the Eurozone, just like depositors are being made to
pay for the privilege of lending their hard-earned money to shaky banks.
Insurance companies, but also other financial institutions, hold
high-grade bonds to create predicable income streams into the future with
which to pay the promises they made to holders of their life insurance
policies and annuities – a big part of the private pension system. But as
yields are turning negative, future income streams fizzle. It’s undermining
an entire retirement system.
So the reckless chase for yield across the Eurozone is on. They close
their eyes, hold their nose, and wade into more risk, driving down
yields in the process. Already high-grade corporate bonds are experimenting
with zero and negative yields. By March 10, as the ECB was kicking off its
QE, average yields on investment-grade corporate bonds had dropped to 0.85%,
though they have since ticked up to 0.92%. Not enough yield to fulfill the
promises.
So they seek salvation in junk bonds. These risky creatures do well when
endless new money is available to pay off old money. But that can turn on a
dime. When it does, bondholders lose much of their investment and can end up
with very little after a “restructuring,” for example under the protection of
Chapter 11 of the bankruptcy code.
This is happening in the US energy sector right now. These things are
called “junk” for a reason. In the past, investors took the risks because
they were rewarded with high yields. But not anymore, not since global QE and
interest rate repression ruined pricing of risk.
And so yields of euro-denominated junk bonds have plunged, with the
average yield hitting 3.56% on February 27, though it has since ticked up to
3.92% on Thursday. By comparison, in the US, the average yield for equivalent
dollar-denominated junk bonds, according to BofA Merrill Lynch high-yield
index was 6.30%.
It doesn’t take a genius to figure out what’s next.
US junk-rated issuers see this difference. They know where the cheap money
is being offered. They know where to find desperate investors driven to near
or total insanity by central bank policies.
Laboratory products distributor, VWR Corp., out of Radnor, PA, just went
public in October, raising $536 million. It’s part of the exit strategy of
its PE-firm owners led by Madison Dearborn Partners. Now it needs more money.
So on Thursday, according to Bloomberg,
it sold €503.8 million in junk bonds in Europe.
IMS Health, based in Danbury, Connecticut, offers analytics and services
to Big Pharma and other members of our healthcare scheme. It went public in
April 2014, raising $1.3 billion, to provide an exit route for its PE-firm
owners, led by TPG. It scooped up €275 million of cheap money in Europe.
Infor, a software company with 70,000 customers in 194 countries, as it
says, is owned by PE firm Golden Gate Capital Partners. It sold €350
million in junk bonds.
Other American companies did too. So far this year, they sold a total of
€3.28 billion in junk bonds in Europe, the most for this period of the year
in the history of the euro.
But this is just the beginning. And another unintended consequence of the
ECB’s QE: shifting of junk and risk from the US to the Eurozone – from
US bond funds, retirement portfolios, and insurance companies to unwitting
Europeans who are turning part of their income over to life insurers to
supplement their future retirement income.
This is a godsend for America. It’s like being told by Draghi to ship
our toxic waste to Europe, neatly packaged in corporate speak and
labeled as “top soil,” to be sold for top euros.
As the ECB’s QE gets going in earnest, junk bond yields might fall
further, and buyers might get ever more desperate, until in the end even our
energy companies, teetering at the verge of default and bankruptcy, can raise
some cheap money from unwitting Europeans who are trying to create a
retirement nest egg. It would allow these nearly bankrupt energy companies to
pay off and make whole their American investors. Thus they can keep
on fracking and producing even more oil and gas that they can continue to
sell below the cost of production. It’ll work as long as there is plentiful
supply of nearly free money to fill the holes.
The fracking boom in the US started with natural gas. And now it’s destroying
its investors. Read… Investors
Crushed as US Natural Gas Drillers Blow Up
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