Investors dumped $2.3 billion into collateralized loan obligations in July. CLOs. The acronym alone should send you running. These are bundles of leveraged loans to companies that couldn't get normal financing, repackaged and sold to people who think "attractive yields" means free money instead of what it actually means, which is you're being paid extra because there's a decent chance you'll never see your principal again.
But sure. Chase that yield.
The beauty of a CLO is that it takes debt from companies already drowning in debt, slices it into tranches like a financial charcuterie board, and sells it to investors who apparently learned nothing from 2008. Except this time it's loans instead of mortgages, so it's completely different. Totally safe. The rating agencies said so.
Attractive yields. That's the phrase they used. You know what else offers attractive yields? Lending money to your cousin who just got really into day trading. Putting your savings into a poker game where everyone else at the table works for Goldman. Buying insurance on the Titanic while you're standing on the deck watching the iceberg approach.
Two point three billion dollars. In one month. Into the riskier corner of the bond market. Not the safe corner. Not the boring corner. The *riskier* corner. They went out of their way to find the corner with the flickering lights and the suspicious stains and the sign that says "Enter at Your Own Risk" and they brought $2.3 billion with them.
The technical setup doesn't care. Price action doesn't read prospectuses. The chart can't tell the difference between a CLO and a government bond and a Wendy's gift card. But when this trade goes bad, and it will, because trades that advertise themselves as risky tend to fulfill that promise, those investors will be shocked to discover that risk means risk.
They paid extra for the privilege of losing money faster.
Photo by Markus Winkler on Unsplash
Leave a Comment