David@valuealigned.com
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Berk's Blog

Beginning of the End for Bonds – Pop Goes the Great Credit Bubble

The Great Credit Bubble is unraveling at the bottom in “junk bonds”, below BBB- ratings. This will quickly make its way into all debt. I don’t know if the Federal Reserve is ready for this. If you have been reading my Blog – you are ready for it.  Bonds of all types and “income” generating equities like MLPs are in a bubble – the bubble is bursting as I write.

You can see from the chart below that High-Yield bonds are plunging. Distressed debt is rising rapidly.  Kinder Morgan (KMI) cut its dividend today by 75%; forced by their bond holders who told the Board through selling down its debt that it needed to conserve cash and could not get financed for growth from the stock market. All the energy Master Limited Partnerships (MLP) are getting killed off this junk bond yield.

The pain will spread from there, as it always does when the credit cycle ends. I have been warning all of you not to chase yield. Too many thought the Fed had abolished all risks and plunged into risky bonds with ludicrously low yields. They’re getting killed even though the fed funds rate is still at zero!Distressed High Yield Index