"Beware the overpriced debt markets in 2007 / economist"

very good summary on the correlation of debt and other asset classes like equities. the first sign of trouble for the stockmarket will be trouble in the debtmarket like a big default or spike in spreads.

klasse zusammenfassung über das zusammenspiel von krediten und anderen vermögenswerten. die ersten probleme im aktienmarkt werden sicher mit problemen wie ausfällen oder einem ansteig der spreads im kreditmarkt einhergehen.

GENTLEMEN prefer bonds. If you look round the world for speculative excess at the end of 2006, there are many more signs in the supposedly staid world of debt than in the stockmarkets.(unfortunately they are closely correlated, dummerweise hängen diese beide eng miteinander zusammen)

Investors are enthusiastic about buying fixed-income assets, even though yields are low by historical standards and the returns on cash (particularly in America and Britain) are as attractive.

Many investors in shares argue that the low levels of bond yields make stockmarkets look cheap. To take one example, emerging-market bond spreads (the excess yield over American Treasuries) are close to all-time lows, according to Morgan Stanley, an investment bank, whereas emerging stockmarkets trade at their usual discount to developed-world shares. In the short term, the perceived cheapness of debt is persuading private-equity groups that they can make big profits from buying quoted companies. And the prospect of such bid activity is keeping a floor under share prices.


But there may also be structural reasons why investors are favouring bonds over shares. The first is that savers have changed. Pension funds and insurance companies in the developed world have become more cautious (thanks to regulation and the bear market of 2000-02) and are increasingly buying bonds in an attempt to match their liabilities. Furthermore, savers are no longer risk-happy Americans but Asian central banks, which have traditionally put bonds at the core of their portfolios.

A second reason is the massive growth of credit derivatives, which has given investors the ability to sample the debt markets so as to get exposure to the precise risks they find attractive. Debt is no longer just plain vanilla; now there is as much variety on offer as at an Italian gelateria; credit risk can be scooped out and separated from interest-rate risk; money can be made from predicting default as well as avoiding it. Rather than investing in a few, often illiquid, corporate-bond issues, investors have a host of vehicles to choose from..... Abundant liquidity has persuaded people to accept lower yields as a result.

All this has coincided with an exceptionally favourable period for corporate-debt markets. Companies have been extremely profitable, generating more than enough cash to service their debts; as a result, the default rate has been very low. Traditionally, low default rates have been associated with low spreads.

Of course, markets are supposed to look forward. All this good news might prompt investors to believe debt markets are close to a turning point. Indeed, corporate-bond spreads did edge higher earlier this year, before taking another downward lurch in the autumn.

The debt markets seem to offer little scope to absorb bad news. As Barclays Capital, a British investment bank, neatly puts it: “The entire asset class of bonds is characterised by symptoms of overvaluation and complacency.” ( they have fallen asleep...... / sind wohl eingedöst...)


But what will puncture that complacency? The most likely cause would be a big default. If the global economy slows next year, companies will find it more difficult to service their debts. And bid fever has prompted borrowers to take on more risks; according to Standard & Poor's, a rating agency, the average purchase price for European leveraged buy-outs has reached a record level of 9.4 times earnings before stripping out the costs of interest, tax, depreciation and amortisation.

The real test will come when spreads start to widen again. Will the rapid emergence of credit derivatives and the greater role of hedge funds make markets more—or less—stable?

There had been fears that hedge funds would be less willing than banks to stump up rescue money in a crisis. But the recent case of Polestar, a British printing group, showed that companies can be refinanced smoothly even if hedge funds are involved. In addition, plenty of distressed-debt funds specialise in taking positions when things look ugly.

Another fear is liquidity. Hedge funds have actively provided credit via leveraged loans. There is a risk that, just when borrowers get into difficulty, hedge-fund clients may demand their money back......

Plenty of people believe the financial system is more secure than before, because banks are not as vulnerable to the threat of corporate failures. The markets have survived the crash of big companies, such as Enron, an energy trader, and the downgrades of motor companies, Ford and General Motors, in recent years.


But the real test of a big recession has yet to be faced. If you want to dwell on one financial worry for 2007, the corporate-debt market is the place to start.