It has been a good six months for borrowers in the high yield market who raised a record $180bn in the period. Two-thirds of that has gone to refinance debt at ever lower yields, and another 16 per cent to help finance new mergers and acquisitions.

Still, although there is virtually no sign that the Federal Reserve has any intention of exiting its easy money policy any time soon, the congenitally pessimistic denizens of the bond markets are already fretting that when rates rise, the process will be far more painful than in the past as investors all decide to hit the sell button at the same time. Many hedge funds hold short futures positions in a bet that rates will rise in the middle of 2015,

Demand for credit has grown far faster than equities, according to analysts. Indeed, since the end of 2008, the three fastest growing asset classes have been fixed income exchange traded funds, emerging market corporate debt that is dollar denominated, and US high yield.

Meanwhile, spreads to Treasuries continue to grind tighter. All this makes these asset classes, and high yield debt in particular, more vulnerable to outflows with even a small move up in rates.

In other words, the longer easy money continues, the trickier the exit and more dire the consequences in the eyes of the debt markets. The end of easy money will hit bond markets hard if not timed right

It has been a good six months for borrowers in the high yield market who raised a record $180bn in the period. Two-thirds of that has gone to refinance debt at ever lower yields, and another 16 per cent to help finance new mergers and acquisitions.
Still, although there is virtually no sign that the Federal Reserve has any intention of exiting its easy money policy any time soon, the congenitally pessimistic denizens of the bond markets are already fretting that when rates rise, the process will be far more painful than in the past as investors all decide to hit the sell button at the same time.  The problem is that the Fed seems to want to begin tightening (at some stage in the future) without bringing asset prices down, since the whole point of the QE exercise was to raise asset prices in the first place.

The stock market continues to set new highs, though corporate earnings do not warrant those gains. Meanwhile, with growth down almost 3 per cent for the first quarter, GDP for the first half will probably be close to zero. Corporate investment in anything other than share buybacks is minimal. Indeed, the Fed policies give companies every incentive to indulge in share buybacks rather than investing in plant and equipment, let alone in hiring.
Meanwhile, speaking at the International Monetary Fund on July 2, Janet Yellen, chairwoman of the Fed said that “financial stability risks shouldn’t have a central role in monetary policy decisions, at least most of the time.” For financial stability, substitute asset price inflation. What she implies is that there is not enough of a bubble to warrant a departure from easy money. The desperate search for yield is considered an affirmation of Fed policies.

Does the Fed wants to have its cake and eat it too?