Be Afraid

From Bloomberg:

Goldman Sachs Says Don't Be Afraid as Bonds Trade Over Par: Credit Markets

The highest corporate bond prices in more than six years show investors reconsidering an aversion to buying debt trading above face value as the Federal Reserve is compelled to take more steps to boost a slowing recovery.

The average investment-grade bond price has jumped about 4.5 cents to more than 110 cents on the dollar in the past two months as yields fell 73.5 basis points to 3.929 percent, according to Bank of America Merrill Lynch index data.

With short-term interest rates near zero and the pace of an economic recovery slowing, investors may drive prices higher as they turn to credit markets to bolster yields, said Alberto Gallo, a strategist at Goldman Sachs Group Inc., the U.S. bank that makes the most revenue from fixed-income trading.

“Even if prices look high, the current search-for-yield environment may drive them even higher,” Gallo said yesterday in a telephone interview from New York. “Investors have been worried about high prices because buying bonds trading substantially above par exposes them to more losses if spreads widen. When you put more capital to work, your level of risk increases as well.”


Investors, desperate for yield, are looking to high yield bonds to fill the void after being punished in stocks over the last two years.

Declining interest rates and a savings rate that has reached the highest in almost 18 years may continue to fuel a reach for yield that has bolstered credit markets since 2009.

Primary issuance is strong, but it’s a fraction of last year’s,” said Gallo, one of the strategists who wrote investors shouldn’t “be afraid of high prices” in a note to clients this week. “On the other hand, demand is closer to 2009, as shown by the $70 billion of inflows in investment-grade mutual funds, year-to-date. If investors get under-allocated in the primary market, they will eventually seek bonds in the secondary. High- priced bonds trading at a yield premium will soon look attractive.”

When prices are at or near face value, corporate bond investors typically look more at the excess yield that debt pays over Treasuries to determine whether the securities are cheap or expensive.

While the spreads on investment-grade debt have declined to 188 basis points from 600 basis points in March 2009, they’re still 56 basis points wider than in August 2007, when central banks globally pumped $135.7 billion into the banking system in an attempt to avert a growing crisis of confidence.


When Goldman is telling investors not to be afraid we know something must be up. The stockmarket appears poised for another downturn this morning, and we will soon have mid term elections upon us, which typically drag stocks lower. The Goldman solution - buy more high yield Corporate debt. At least this particular advisor states that as you put your money to work, risk increases. A truer word was never said.

This is the world of ZIRP (zero interest rate policy) which causes all kinds of financial distortions. Investors become speculators as they frantically try to find some safe haven for their hard earned cash. The Federal Reserve and the central planners contribute to the problem by debauching the currency.

In this environment cash for the short term, and physical gold and certain gold stocks for the longer term are the best havens, in my view.