Interest Rate Roundup

Tuesday, July 10, 2007

The return of risk, redux

On June 22, I pointed out that "several measures of liquidity and risk appetite appear to be flashing yellow." In short, market volatility measures were holding steady at elevated levels despite strong global stock markets. The Blackstone IPO (perhaps a bellwether for the private equity boom/bubble) was proving to be a flop. The yield curve was steepening ... the commercial real estate equities were continuing to struggle ... and the junk bond market was starting to choke on all the issuance of super high-risk debt.

Have things changed since then? Not really. If anything, conditions have continued to deteriorate. Indeed, the Wall Street Journal has a story this morning about the awful recent performance in the junk bond market (It's having its worst run since 2005). Here's an excerpt:

"Prices for so-called junk, or high-yield, bonds have fallen in recent weeks, partly thanks to rising yields on safer bonds, like Treasurys. Investors are also pulling back from riskier bonds like these amid worries about the mortgage market and troubles at two Bear Stearns Cos. hedge funds.

"Money managers are also shying away from the slew of new junk bonds coming to the market. Just yesterday, meat-processing company Swift & Co. had to withdraw its $600 million-junk bond offering, the fifth such deal to have soured in the past two weeks."

Meanwhile, Bloomberg just ran a story pointing out how corporate bond risk is rising the most in four months amid concerns about corporate earnings and housing. The piece mentions how the cost of buying debt default protection in the credit default swaps market is on the rise.

And that CBOE OEX Volatility Index, or VXO? It's still creeping upwards, with a series of higher lows as shown in the chart above. If there's one thing that can throw a wrench in my forecast of higher interest rates, it's some sort of financial blow up. Are these indicators suggesting one is on its way? Too early to say, but definitely worth watching.


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