From junk bonds to cryptocurrencies, three reasons why markets may be losing their minds

What is happening?
What is happening?
Image: Reuters/Clodagh Kilcoyne
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If you own junk bonds, cryptocurrencies, or exotic exchange-traded funds, congrats! You are probably feeling pretty rich right now.

But so much money is pouring into these and other risky assets that sober-minded analysts are worried that markets have gone haywire. Three things stand out, in particular:

Junk bonds

Higher-grade American companies have borrowed nearly $1 trillion this year in the bond market, on pace to set a new record, according to Bloomberg. And investors are lending money to junk-rated borrowers—the riskiest, “high yield” bonds—at interest rates near all-time lows. Bond markets “definitely look well-valued here,” according to Noel Hebert, an analyst at Bloomberg Intelligence, echoing warnings from major money managers.

Volatility-tracking ETFs

Amid many frothy assets, exchange-traded funds that make bets on volatility are among the most overvalued, according to Alberto Gallo, head of macro strategies at Algebris Investments. Subdued market volatility, or short-term price swings, seems entrenched, confounding analysts.

Investors have poured money into exotic ETFs that bet on markets remaining placid and into funds that wager on low-volatility stocks. Such strategies used to be the domain of sophisticated quant funds, but ETFs have given ordinary investors easy access to such bets. Those trades have become crowded, strategists worry, and perhaps aren’t suitable for the buy-and-hold investors now dabbling in volatility-linked securities.


And then there are cryptoassets. Bitcoin, the cryptocurrency that started it all, has set records of late. It survived a contentious “hard fork” that saw the cryptocurrency split in two. It also got a vote of confidence from Goldman Sachs this month, which acknowledged it’s harder and harder for institutional investors to ignore cryptoassets. A major exchange is developing futures for bitcoin, while cryptocurrency exchange operator Coinbase is apparently valued at more than $1 billion.

Cash is splashing around in the Initial Coin Offering (ICO) market, too. So much so that US financial regulators have signalled that further scrutiny could be on the way. However, Paragon, a company whose CEO is a former Miss Iowa and is also promoted by rapper The Game, says a regulatory crackdown wouldn’t apply to it. The group says it wants to raise as much as $100 million for its cannabis-blockchain enterprise. (By comparison, Google reportedly started with a several sub-$1 million investments before raising $25 million from Sequoia in 1999.)

A hallmark of booms and bubbles is the belief that a “new era” is upon us, according to Nobel economic prize winner Robert Shiller in his seminal book Irrational Exuberance. Such thinking could perhaps be applied to unusually loose Federal Reserve policy that has helped drive up assets like junk bonds, or to innovations like distributed ledger technology that enables cryptoassets. Bitcoin, blockchain, and ICOs certainly fit the description of innovative promise—a new era. Some amount of over-enthusiasm may be inevitable.