U.S. High Yield 2016 Worse Situation Than 2007 Subprime

One of the things I've heard lately is either high yield oil debt is nothing like 2007 subprime mortgages, or it is like subprime, but much smaller.

Jeffrey Snider at Alhambra crunches the numbers for us in It Starts: Junk Bonds ‘Contained’.

n net terms, there was about $9.4 trillion in MBS debt outstanding at the end of 2007; $8.3 trillion in corporate debt (again, not including leveraged loans) at the end of Q3 2015. To suggest there is no comparison of leverage or risk exposure then to now just isn’t in any way correct. There might have been more raw mortgage volume in the housing bubble, but not so much more as to preclude any risks at all in 2016 and certainly nowhere near the “yawning gap” Mr. Slok tries to claim. Instead, the proportion of junk within the latter corporate bubble might in many ways mean a much more precarious station as the junk bubble is just now starting to crack up.

Where there is even more common ground is that true monetary condition that seems to be far too similar to 2008. The Fed believed itself “aggressively” accommodative in terms of monetary policy but the results prove, inarguably, it was no such thing at least not in the method that would matter. The eurodollar system imploded and thus removed all support for asset prices which were liquidated in general fashion as it occurred; often swiftly. The eurodollar system now is in the same position if not yet with the same sustained intensity; however, we have seen glimpses of that already in general, global liquidations if only in acute, discrete outbreaks to this point. But that is as much a warning of the similar type of general monetary instability; a warning not heeded by economists that never see these things coming because they remain fixed to a central bank-centric monetary system that ceased to exist as early as the 1960’s.

In other words, there remains the potential for a great deal more blood to flow – into the streets or just contained within the realm of wholesale finance. In the end it may not matter which, as the imbalances then and now are in some ways just the same if expressed slightly differently. The risks are all still there, and economists are still determined to downplay if not miss them entirely.

High yield credit spreads remain in risk off territory.