As the America Federal Reserve raises rates on Wednesday December 16, it will mark the 7th anniversary of the start of ZIRP on December 16, 2008.
ZIRP was implemented in the aftermath of the collapse of Lehman Brothers in September 2008 and the subsequent US and global financial markets meltdown.
Was ZIRP free? No, it cost the Fed, or the American tax payer, US $4+ trillion on its balance sheet to suppress interest on ordinary saving instruments over the same period via Quantitative Easing or QE.
Top economists, according to the WSJ, believe that the Fed won't be able to sustain short-term interest rates at higher levels:
1. Many (60%) consider it likely that short term interest rates will be back near zero within five years;
2. Some (39%) feel that the Fed will begin a new round of large scale asset purchases within the next five years;
3. Few (18%) believe that the Fed will have to lower its target for the federal funds rate below zero in the next five years!
We believe that "Junk Bonds" are likely to be the first major casualty of the end of ZIRP in parallel with extremely high volatility in emerging markets and commodities. As the dollar strengthens, the multi-trillion dollar carry trade is likely to diminish significantly as money is repatriated back to hard currency zones from emerging markets!
During the last seven years, junk bond issuance has soared, driven by the scramble for yield among money managers and retail investors alike.
As a result of ZIRP, during the dark days of the financial crisis and its aftermath, junk bonds outstanding surged by nearly 40% to $875 billion by the end of 2010. Thereafter it was a nuclear chain reaction. By the end of October 2015, another $725 billion had been issued, bringing total junk bonds outstanding to $1.7 trillion.
During the Fed’s 84 month long play with ZIRP, the Wall Street junk bond underwriters became busy like never before. They managed to issue $1 trillion in new junk bonds, and at the lowest spreads in the 35 year history of the high yield market.
Junk bonds are a large FED or Financial Explosive Device with cascading global impact.
What are your thoughts, observations and views? http://ow.ly/VXDwl