In the old days, about five years ago, crowding out in a debt market meant that one sector of the marketplace was taking away the money that was earmarked for another sector.
Most of the time, the discussion centered on rising interest rates. The theory was the higher the treasury rates rose, the more the debt buying crowd would opt for government guarantees vs. corporate promises.
As money poured into the safety and security of Uncle Sam, it was at the expense of primarily those corporations who had been tagged junk bond status. For the past few years, there has been virtually no crowding to speak of since Uncle Ben and his band of hooligans have instituted ZIRP, the Zero Interest Rate Policy.
As a matter of fact, this policy has forced retirees and many fixed income investors to move, whether they want to or not, further out on the risk curve just to receive some assemblance of return on their money. Now however, after the coordinated action of the central banks, crowding out could return with a vengeance.
Perception sometimes is reality, and the perception is the U.S. Feds got the European governments’ backs. Of course, we saw how that worked out in 2008.
Currently, the non-investment grade corporate bonds in Europe have been an attractive haven, yielding as much as 7%+. The risk has been mitigated by the low percentage of defaults, less than 2%. With no competition, the low-rated corporations have had easy access to the debt market.
Now, it all changes.
Greece, Italy, Portugal, Ireland, Spain, and even the UK and France, have either become or will become junk bond status. They may not reflect it in their ratings, but it certainly shows in their bond yields.
Given easy access to credit swaps, the junk bond buyers would be foolish to buy corporate rather than government.
Therefore, look for the corporations who have been dependent on the credit markets for survival to find 2012 a difficult and most impossible year. Defaults and bankruptcies should increase as much as ten-fold.
Crowding out can get you buggered in a hurry. Anyone for a short position?
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