(New York)

The high yield market is looking shaky, and that may spell bad news for shares. The junk bond market has succumbed to a wide spread selloff this Autumn, led by the telecoms sector, and that is raising fears that the trouble may spread to stocks. Telecoms account for a major chunk of high yield, and most retail investors have exposure to the junk bonds through passives. If the selloff continues, they could get spooked, and pull out of not just high yield but also other risk assets like stocks. Shares of telecom companies have fallen 20% in 2017.

FINSUM: While junk has been weak, the telecoms sector is experiencing some sector-specific upheaval. Thus, the gloom may not spread across the entire market.

(New York)

We have been in a 30-year bond bull market with yields well below historical norms. One of the big theories for why yields have stayed so low is the concept pf a global savings glut. The savings glut was caused by a jump in people aged 35-65, or the prime earnings years when savings tend to be accumulated. However, if that was the driver for the bull market, then it is set to reverse very soon. The reason why is that the amount of people in this prime age range is changing, and the propensity to save will be lower, which has led some economists to call for big rate rises and simultaneous losses in equities.

FINSUM: While the demographics are hard to argue with, we think that there is another to be considered—the amount of people over 65. This later stage requires more income, which means there could be a shift into bonds, which would keep yields locked in place.

(New York)

What goes up must come down, and that truth appears to be poised to become a reality for an important, but niche area of the credit markets. CLOs, or collateralized loan obligations, look set for some big losses. Spreads in the area have been tightening rapidly as refinancing has hit a fevered pitch. Unlike in junk bonds, it is very easy for borrowers to prepay in CLOs, leading to large scale re-financings in the sector. This has led to managers of CLOs giving lower payouts to creditors, and overall, lenders have little power in the market as CLO yields are still better than elsewhere.

FINSUM: This is a definitely a sharp rise of the market, but there appears to be little sign that things are suddenly going to reverse.

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