Credit contagion returns

In order to see meltdowns coming, you have to be looking for risk. Most financial types are paid to sell risk, not manage it.

Warnings of a high-yield bust were plentiful: The shale driller that missed its first payment. The clothing manufacturer and the software maker among the many companies that issued debt, payable in more debt, earmarked to reward managers who’d already loaded them up with debt.

They had willing buyers, all of them. Investors have poured $240 billion into junk-bond funds since 2008, tripling the total commitment, in a desperate hunt for decent returns while the Federal Reserve pumped $3.5 trillion into the financial system and kept interest rates near zero for seven years. Junk-bond traders helped fund America’s shale boom and gave the cheapest money ever, even to companies deemed by Moody’s Investors Service to be “very high credit risk, poor standing.” Now they’re finding out what happens when the fling is over and everyone wants their money back at once. See: Investors ignored risk of junk-bond rout.  Here is a direct video link.

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