Yield and Credit

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Hunt for Yield and Wild Goose Chases

Triple A, 30-Years? Mate, That’s a Bargain

Sinking Yuan Risks Dragging Down Banks

Silicon Valley’s Cool Kids Are Turning Into Squares

 

A rotation on investors’ flavour 

The demand for High dividend yield changes since the yield left the bottom.

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The rotation might be another overreaction, but valuations for dividend stocks are still lofty.

 

Anyway, the looking-for-yield game seems not going to end

Australia’s government sold its biggest-ever bond, raising A$7.6 billion ($5.8 billion) in its first ever offering of 30-year notes (triple-A rating). The 3.27 percent yield is less than what the country paid for securities due in five years as recently as 2014, and buyers from abroad snapped up almost two-thirds of the issue.

<- That yield and credit score combination make the 30-year notes particularly attractive to global financial institutions, which have started to adopt new liquidity coverage ratios required by banking rules introduced after the 2008 crisis. [1]

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Banks, however, are in the business of making money, not holding bonds for an unlikely run on deposits. So treasurers go through pains to try and squeeze some yield out of holding all those godforsaken securities. That’s become increasingly difficult since the European Central Bank and the Bank of Japan (in spite of its nation’s single-A credit grade) embraced negative interest rates.

 

Another negative-rate environment trait is that the average maturity of debt lengthens. There’s a body of academic work that has found a correlation between lower yields and longer government debt maturities.

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While banks in China is suffering from a weaker yuan

Investors have good reason to worry as debt continues to explode and money keeps flowing out of the country. Goldman Sachs says a rising amount of capital is leaving China in yuan rather than dollars and the moves can’t be explained by market-driven factors.

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While less expects stimulation on export, outflows in turn will further weigh on the yuan in a vicious cycle that could have serious effects on China Inc., especially given that the country’s corporations have taken on record amounts of foreign currency debt.

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This year alone, dollar- and euro-denominated loans taken out by Chinese companies have reached $195 billion, bringing the total outstanding to about $650 billion. That’s equivalent to the total amount of subprime mortgage loans outstanding in the U.S. in 2008.

-> S&P Global Ratings said that if China’s corporate debt doesn’t stop growing, it could cost banks $1.7 trillion (the amount of extra capital they would have to raise.)

(That’s why the state just issued guidelines for how banks may swap bad debt to equity. One may argue lenders will not be happy to hold hundreds companies in sectors with little prospect of turnaround, such as steel or coal mining. But at least according to Oliver Hart, it can be an efficient way to solve debt issues.)

 

Start-ups also feel cold on less capital inflow

Capital going into start-ups globally has fallen for the last four quarters to reach $24.1 billion in the third quarter, a level not seen since two years ago, according to a KPMG and CB Insights report. The trend holds for early and late-stage funding rounds.

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A big reason for this is that valuations are cooling for many private start-ups from the biggest such as Airbnb to smaller ones like Rocket Internet-backed Global Fashion Group.

<- Funds are loath to contribute more money to a start-up in a later round at a lower valuation since it looks bad for their own performance. So they’re pushing their companies to pay more attention to profit and cost, rather than just handing them more cash to let them pursue breakneck sales and user growth.Uber’s tactical retreat from a war of attrition in China is but one example.

However, VCs have secured promises worth billions from limited partners, such as endowments and foundations, who expect them to put money to work. [2]

-> “VCs may need to get out their comfort zones to invest in a broader palette of sectors.”

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[1]

Those Basel III guidelines mean that banks need to hold enough liquid securities to withstand 30 days of the kind of liquidity crunch that was seen back then. The devil in the detail here is what constitutes liquid. And outside of good hard cash, triple-A government securities get one of the best regulatory treatments.

[2]

The life of a typical fund is between eight and 12 years, and investments are made gradually in the first half of that period.

 

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