Markets have been behaving as expected. Funds continue to pour back into equities. As pointed out many times before, there is a lot of funds swishing around and they are being put back to work. Risk aversion is no longer an issue, coupled that with global low interest rates, funds would be damned if they cannot get higher returns. A good benchmark would be those papers we call junk bonds. OK maybe not really junk bonds but those rated B or worse. Blockbuster (the video/dvd rental company) had a lot of trouble raising funds 10 months back. In a recent offering for bonds due 2014, demand was so great that it was able to raise $675m. Granted, its a dicey company, hence the yield was an attractive 11.75%, still it showed that there was a willingness to put funds back to work, even in iffy companies. Over the last 6 months, an estimated $20bn has poured back into junk bond funds alone.
Is this healthy? Well, not really as investors start to chase for higher yields. When you consider the 11% for junk bonds, equities at present levels seem like a better play - even though stocks do look a bit pricey as well.
A better example would be the country bonds for Lithuania, Fitch has downgraded the country bonds 3 times this year alone and its GDP is expected to fall 18% this year, but last month this problematic Baltic nation was able to raise $1.5bn with a yield of 6.8%. Have investors lost their minds. I certainly view that country bond with a lot of trepidation as most of the Baltic region has a long way to go to restore confidence. Even Sri Lanka, with its civil unrest was able to raise $500m at a yield of 7.4%.
These are danger signs but also signs that a new bubble is forming. Should we all jump ship... well, you can jump ship too soon. While I see the makings of a fresh bubble, a liquidity bubble of a different kind, these events will take some time still to prick the bubble. Bottom line, things are fine but the reality is getting out of sync a bit, bears watching, its a traders market for now. Will warn further if things really get out of hand.
p/s photo: Chrissie Chau
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