I HAVE BEEN SAYING THIS FOR MONTHS ABOUT YIELD REACH!
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Some investors are pursuing the safety of federally insured deposits. Others are dissatisfied with low nominal and negative real returns and are moving further out on the risk spectrum in their zeal for yield, regardless of whether they understand the additional risk they are incurring.
In a speech at Jackson Hole, Wyoming, in late August, Federal Reserve Chairman Ben Bernanke acknowledged this possible consequence of his policies. There are concerns that by pushing longer-term yields lower, the central bank’s “nontraditional policies,” namely quantitative easing, “could induce an imprudent reach for yield by some investors and thereby threaten financial stability,” he said. Yet he dismissed this threat, saying, “We have seen little evidence thus far of unsafe buildup of risk or leverage.”
I see lots of potentially unsafe buildups. Consider the rush into junk bonds, depressing their yields and spreads versus Treasuries. So much money has poured into below-investment-grade debt that it now takes real skill to default. In the third quarter, junk-rated companies sold $94 billion in debt compared with $25 billion in the third quarter of 2011. Nonetheless, the global recession will hype defaults even though many low-rated companies have a cushion of safety from prefunded debt.
SOURCE: http://www.bloomberg.com