People have been talking about a “debt bubble” for some years now. They’ve been right, of course, based on the combination of surging borrowing and plunging rates. But the bubble hasn’t stopped inflating, and recently it entered what certainsly looks like a terminal blow-off stage. Some highlights:
Though July, China’s total debt rose by $2 trillion, a year-over-year increase of 26%. And this month the Chinese government cut bank reserve requirements in an attempt to further rev up lending.
In Japan, the junk bond market is being constrained by banks so desperate for yield that they’re lending directly to companies previously considered too risky. See Japan Junk Bond Market Hopes Crushed by Banks Hungry to Lend.
A recent week of corporate bond issuance was “the biggest weekly volume to hit global markets on record,” according to Dealogic. US investment-grade companies raised $72 billion across 45 deals, equaling the total issued in all of August.
Numerous companies issued 30-year bonds with yields below 3%, which used to be the province of safe haven governments. Even Apple, which is sitting on an epic pile of cash, borrowed money.
At the other end of the spectrum, junk bond issuer Restaurant Brands, which owns the Popeyes and Burger King chains, sold 8.5-year bonds with a coupon under 4%, a record low yield for a US junk issuer.
In Europe sales of new bonds hit $1 trillion earlier than in any previous year. Fully a third of European investment-grade bonds (and some junk bonds) now trade with negative yields. And the ECB is expected to cut rates further at its upcoming meeting.
Why is all this happening? Three reasons:
1) Virtually all the world’s central banks are now easing, sending interest rates to record lows in most major markets. The lure of this ultra-cheap money is proving irresistible even to borrowers who don’t immediately need cash.
2) The world is looking increasingly scary, what with trade wars, military brinkmanship in Asia and the Middle East, and the hint of an incipient global recession. So a massive cash hoard is increasingly seen as a good thing to have.
3) Bubbles generally end this way, with everyone just giving up on self control and grabbing for one last piece of easy money.
All three of these rationales will probably turn out to be mistaken. But that’s just how it goes in financial manias. As Credit Bubble Bulletin’s Doug Noland notes, “It’s difficult to envisage a more manic bond market environment – at home or abroad.”