But even if you believe another crisis is brewing, it's most likely
not where it was last time. At least not in U.S. securitised
mortgages - the heart of systemic blowout that nearly brought down
the global banking system in 2008.
A mix of tighter regulation, stricter underwriting standards and the
lowest new mortgage applications in almost 20 years means sales of
private U.S. mortgage-backed securities have dwindled to just $600
million (350 million pounds) so far this year - a mere sliver of the
record $726 billion of new bonds in 2005.
For what it's worth, new U.S. bonds backed by subprime mortgages
chave all but vanished. Bonds backed by subprime U.S. auto-loans
have taken up some of the running, but not on anything like the same
Yet in its latest annual report the Bank for International
Settlements, the Basel-based forum for the world's major central
banks, seemed pretty convinced global debt markets are once again in
risky territory and heading for a fall.
The BIS focused mainly on fresh accumulation of new corporate and
sovereign debt by asset managers rather than banks and scratched its
head about the coincidence of sub-par economic activity and record
low default rates that in turn depress borrowing rates and credit
spreads ever lower nearly everywhere.
'Exuberant' equity and real estate and rock-bottom financial
volatility merely fed off that picture, it said. And it added that
if all this was simply due to zero official rates, it could all
suddenly go into reverse when they rise.
"It is hard to avoid the sense of a puzzling disconnect between the
markets' buoyancy and underlying economic developments globally,"
the report mused.
Low-grade corporate rather than household borrowing was marked out
for special attention.
New sales of 'junk' bonds worldwide hit a quarterly record of $148
billion between April and June, according to ThomsonReuters data.
That's up from average quarterly sales of around $30 billion before
the last credit bubble burst.
Additionally, more than 40 percent of new syndicated loans signed
for companies last year were low-grade leveraged loans - more than
in the 2005-2007 period. Increasingly the money was raised without
creditor protection in terms of covenants.
So could this be the new subprime? Banks' inability to hold large
inventory of these bonds since the crisis helps insulate the banking
system per se but their limited ability to broker the market risks a
stampede for the exit if prices become hard to find - with all the
attendant shock that could deliver to corporate finance generally as
well as savers and fund managers.
After all, it was the post-crisis retrenchment of straight bank
lending that pushed many firms to move en masse to the bond markets
and seek investors direct. If that avenue is cut off suddenly and
refinancing difficult, a shockwave would ensue.
And yet for investors grappling with a 'safe' government bond
universe with inflation-adjusted yields of less than one percent,
junk bonds may be their only avenue to meet targets. And that won't
change until interest rates do.
[to top of second column]
Ditto for high-risk government bonds - in particular the high-risk
segment of the euro zone and emerging markets.
Despite a shakeout in larger developing economies over the past
year, appetite has been brisk for the more exotic debt of recent
defaulters and bankrupt nations such as Greece and Cyprus or Ecuador
and Jamaica, as well as a whole sweep of sub-Saharan Africa
countries from Kenya to Zambia.
New debt from high-risk 'frontier' nations, for example, hit a
record $16.3 billion for the first six months of this year, Societe
Indeed, the welter of new bonds sold in recent years by African
nations - just over a decade after multilateral debt forgiveness was
agreed for many of them - led Nobel laureate Joseph Stiglitz to
describe the bonds as "Africa's subprime".
But even though potentially worrisome for poorer countries seeking
'no strings attached' borrowing instead of cheaper concessional
lending or slower foreign direct investment, the scale of debt
involved is nowhere near levels marking a systemic threat for the
global financial system.
The BIS, then, is at most just flagging the risk of higher interest
rates. "The sustainability of this process will ultimately be put to
the test when interest rates normalize."
The seeming inevitability of rates rising from next year suggests
investors should already be bracing for some serious turbulence, if
not quite on 2007 levels.
Yet many still believe central banks will hold off until the last
minute because underlying economies will remain subpar for years to
come as a result of aging demographics and the relentless paydown of
past debts. And with inflation subdued, rates will likely only rise
modestly even when they do go up.
Another Nobel laureate, Paul Krugman, this week scoffed at the idea
interest rates were artificially depressed.
"There simply isn't any macroeconomic case for claiming that
interest rates are wildly depressed relative to fundamentals, and
not much reason to believe that assets in general are overvalued,"
he wrote in his New York Times blog.
Maybe this time it really is different.
(Additional reporting by Sujata Rao and Dan Burns; Editing by Ruth
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