Displaying items by tag: credit

(New York)

High yield companies have been big beneficiaries of the tumble in yields this year. But not in the way one thinks, not in the form of a big rally. Instead, highly indebted borrowers have been using the tumble in yields as a way to refinance their debt and lengthen out maturities. The practice has been very widespread. According to one portfolio manager, “It’s a recipe for disaster in the longer term … As an investor, it means you are lending to fairly risky companies at fairly low rates at the end of the cycle. It might not be three months from now or six months from now, but at some point these bonds are going to be pretty challenged”.

FINSUM: Kick the can down the road for as long as you can. That has been the mantra of junk bond markets since the Crisis. When will the musical chairs stop?

(Beijing)

There have been a lot of stories, admittedly in this publication too, that have diminished the threat of the current trade war with China for the US economy. In a very direct sense, that may be true, but there is a lot of misunderstanding about the Chinese economy. Most people think that China is currently slowing because of the trade war with the US, but that is not really the case. The much bigger issue is that the country’s credit boom has run its course and the government is running out of options to boost growth. The credit boom was caused by the government needing to stimulate consumer spending in an effort to spur a domestic consumption economy, but credit has more or less reached it limits, and therefore, so has the economy.

FINSUM: If China has a big contraction/meltdown, it will ripple across all the countries who are part of its ecosystem, including all the EMs in the region, Africa, and then ultimately the big developed economies with which it is now inextricably linked.

(New York)

The dovishness from the Fed has been bullish for most of the debt market, with sovereign yields falling and corporate debt getting a boost. However, the riskiest corner of the market, triple C junk bonds, have been left out, with the group falling by 1.5% since May. Triple B bonds, by comparison, were up. The odd part about the losses is that signs of an interest rate cut are usually very bullish for junk bonds because they would mean lower interest burdens for the companies. That said, anxiety about the economy is high enough that such benefits were negated.

FINSUM: This whole situation makes sense in that the downside risk of a sinking economy is greater than the upside of lower interest rates for this subsector. Thus, the bonds are losing. In other parts of the credit spectrum, the risk-reward balance is different.

(New York)

For many years after the Crisis, the main theme around consumer debt was the idea that Americans were deleveraging. However, steadily, consumer debt has risen back to alarming levels. In the first quarter of this year, consumer debt hit $14 tn, surpassing the $13 tn of leverage pre-Crisis. Student debt has been a major area of credit expansion. Even when comparing debt to the population, the debt per person is a little higher than in 2008.

FINSUM: So obviously inflation needs to be accounted for here, but the picture is still worrying. It is yet another sign that we may be nearing the end of this run.

(New York)

More some time now, bonds have been sending worrying signals to investors. The huge plunge in yields has been seen as a warning sign that the economy may be headed south. However, more recently, fixed income is sending more comforting signals. In particular, the recent narrowing of corporate bond spreads. Bond spreads had been rising for some time, but have leveled off recently, showing fixed income investors are not as worried about the economy and corporate performance. The overall spread is still well below where it was in the 2015-2016 growth scare.

FINSUM: The leveling off of spreads is a good sign that some stability is coming back to the market.