Monday, February 29, 2016

Hyperinflation in Credit?

So it is easy enough to figure out the effect of the reverse from inflation to deflation on an asset such as homes and the right strategy.  With inflation (over the last 40 years) buy a home, any home and watch your investment grow.  With deflation, sell your home and rent, and watch the home prices drop.  Renegotiate rent lower every three years.  Your landlord will love you because he has a renter.

Now where it gets tough for me, is to wrap my head around what's going on in malcredit, and that is junk bonds (high yield) are faltering.

So junk bonds pay say 10% and there are investors hungry for that yield, in spite of proper labelling: this stuff is very risky.  it's risky, but bondholders are ahead of everyone else in a bust because they lent credit, not bought into the company. Who buys this is people with fairly solid tallies of credit, so it is not quite malcredit, or at least not the bank-generated toxic waste credit.

Next, we have these four parts: the bond issuer (borrower), the junk rate offered, the bond buyer (lender) and the junk rate earned.

Bonds are debt, not equity, so their process is different than equities.  So, when junk bonds sell at ever higher yields, and AAA debt at negative interest rates, then is the spread the thing?  The gap between the two yields?

in hyperinflation, your currency will not buy much of anything.  When dealing in debt and bonds, which pay in interest rates, what is the extreme/  When your yield offer will not get you much of anything?

Still trying to figure this out.

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