Junk Binge Resumes!


The junk bond derivative party is kicking back into high gear.

A report in today's Financial Times notes the uptick, and points out:

"The move into junk bond derivatives also reflects the plunge in yields on actual bonds to record lows."

Everybody loves yield, of course—until they want to flee to cash.

According to the article, the trade has even taken some of the dealers by surprise: "'We see much interest in synthetic high yield, more than we would have predicted just a few months ago,' said Sivan Mahadevan, managing director at Morgan Stanley."

The FT also helpfully notes the following: "There are differences between the current junk bond derivatives and the pre-crisis mortgage structures, dealers said."

That's a useful distinction—since it's generally bad form to attempt to sell a class of security that's already collapsed, while noting that it's functionally identical to the toxic snot you pushed off the last time.

So what's different?

According to the FT, there are two major differences.

First: "Banks' pre-crisis off-balance- sheet investment vehicles are now defunct, limiting the investor base."

From which we are to take what heartening lesson, exactly? Risky assets are now held on balance sheet. Well, I suppose that's an improvement—of a kind.

And this: "Second, the tranches are linked to one, standardized index, rather than tailor-made."

Great! As everyone knows, assets linked to standard indices can never decline in value.

It all sounds so very different this time around...


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