NEED ASSET BUBBLES TO SAVE FROM RISKY SOVEREIGN PAPERS

You will be finding new Debt products/structured debt products to invest as sovereign papers of many countries will be entering into junk status. The government debt rating is simply being murdered and the death is slow poison standing as of today. Today one country is facing the situation tomorrow some other country will get infected with the same disease of negative yields and negative interest rates.  The quality of debt papers held by Insurance, Pension and other institutional investors is a matter of risk.  In Indian context do you know where Insurance companies are buying their debt and what type?

The global equity markets need to get a stupendous rally to save the senior citizens from negative interest rates regime. Either it is Dow Jones or Sensex or Hangseng or FTSE they have to create bubbles or they have to push the market into new highs. There is no alternative to the same.   Please make a note as on today that in the next 3 to 4 years the negative correlation between Bonds and Stock prices will break down. Well in few markets like India we find the same. You will witness massive blows and the historical calculations will be redundant. You will be surprised to know that you need asset bubbles and equity market distortion form the macro front.  Without these gaps, the institutional segment will not survive.

Yes, the time has come when you will be paying the bank for keeping your money. The credit quality concept is already in doldrums. Greece had just sold bonds with a negative interest rate. The pandemic has thrown trillion dollars of funds into the economy but no single penny for growth assets creation.   The total global debt is now soared in recent years and now exceeds $17 trillion.

We need to be ready to witness many economies going for burst out and pathetic problems with meeting their commitments on debt. A global time bomb is ticking and will explode very soon. The contagion impact on different institutional holding and cross border banking involvement will make life miserable.  The key concern is that return expectation from Insurance and Pension funds and all institutional investors on their assets and matching opportunity availability in the market. You should not be surprised that many of these institutions will need further government support to save them. Collateralized loan obligations, or C.L.O.s for short. C.L.O.s are corporate loans that have been packaged into securities are the new debt products being sold and offered on the international market.

The point is that who will be paying for the falling interest rates and unprecedented borrowing. When investors will find that they are investing under negative interest rates then equity markets comes as the saviour in these times.  Investment in risky asset class would come up and this is the time when BBB- or below rated papers will come for rescue and corporate will be able to raise the money. The risk-reward ratio shifts towards the risk assets for the sake of earnings. Equity markets and risk asset papers get more attracted. Pension funds, Insurance and all the institutional investors look for these opportunities for generating nominal or alpha returns.

Bubbles will be required to save these investors. The so-called quest for yield among investors have serious consequences where, low-rated corporate debt, risky assets and creating demand and driving up prices for real estate are going to be few of the key game strategies.

What happened in India with Franklin is that they got into poor quality of company papers for the sake of alpha. Yes, this game of alpha creates a blunder and loss of funds. The 2^nd wave of lockdown and the poor liquidity condition during the pre-covid phase and falling demand due to NBFC crisis starting form IL&FS and then spilling over to other segments lead to massive blow. Even the Indian Co-operative banks were involved in corrupt over-leveraged deals which lead to a massive problem for the Indian economy.   Indian equity market valuation and macro reality are wide and credit papers are at risk. For country like India Sovereign is the only hope since we don’t bet on AAA or AA since one fine morning these alphabets can change easily or can drown without changing

 The biggest risk is that there will be massive sell-off in the global debt market once the rating of downgrade BBB bonds. Since as per the norm many institutional buyers are now allowed to hold debt less than investment grade would be forced to sell at fire-sale prices.  Or they might be asked to hold as tweaking in the law can be made at any point of time. The biggest question is your money safe with Insurance and Pension funds.