This is How Financial Chaos Begins
This is How Financial Chaos Begins
by Wolf Richter February 12, 2016
[font color="blue"]Its not contained.[/font]
There are over $1.8 trillion of US junk bonds outstanding. Its 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 contained.
Yet contagion 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 stressed or distressed. And the entire corporate bond market, which is far larger than the stock market, is getting antsy.
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, as we pointed out. Today, that average yield is nearly 22%!
Today even the average yield spread between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:
At this cost of capital, companies can no longer borrow. Since theyre cash-flow negative, theyll 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. ...............(more)
http://wolfstreet.com/2016/02/12/how-financial-chaos-begins/