Displaying items by tag: credit

(New York)

The next recession has been talked about seriously for the last year or so, and discussion of it is rising now. But what might actually trigger the next downturn? The New York Times sees three possible triggers. The first is the Fed playing the economy wrong and sending the the country into a recession by being overly aggressive with rate hikes. In this scenario, 2020 seems like the doom year. Then there is the risk of the debt bubble bursting (just like the last recession), this time in corporate debt, which has seen a huge surge in issuance since the Crisis. Finally, the looming trade war could drive the whole global economy downward, sparking a major recession.

FINSUM: The corporate debt bubble bursting is a good insight, but much less discussed than the others. It is also interesting because it would be highly linked to the Fed. Maybe that is the double whammy?

(New York)

Investors may need to be very worried about stagnant bond yields. After many weeks of pause, bond yields finally look set to move higher. The ten-year Treasury is approaching 3% and as the good market mood and good economic news continues, it seems there could a surge higher in yields. European yields have also been moving sideways for some time. Improving trade relationships, great earnings, and good economic data mean that the bond market may react all at once in the near-term.

FINSUM: This is an interesting argument—bond yields have been quite stagnant despite good news, and they may ultimately react all at once. Seems plausible right now.

(Istanbul)

Emerging markets have had a rough year, with many major indexes, including in China and Brazil being in or near bear markets. This has led to a great deal of anxiety over the direction of assets, both stocks and bonds, in EM nations. Well, July may be the start of a new phase, at least according to Goldman Sachs. The bank says the emerging markets have hit their bottom and are now poised for a rally. Goldman reminds investors that big asset price moves in EMs are not uncommon, and that this year’s losses are quite ordinary.

FINSUM: The big question here is whether EM equities or credit are a better bet at the moment. Looking historically, credit seems to have a better risk/reward proposition when getting in early in a rally.

(New York)

One of the biggest arguments of the junk bond market is this: one needs to be careful of junk bond indexes because they automatically skew investors to the companies with the most debt, making portfolios inherently more risky. The argument has a seemingly sound logic which is similar to the “skew” often referred to in equity ETFs. However, the reality is the complete opposite, as the companies with the most debt actually tend to be larger and have more conservative levels of leverage. The larger companies with the highest total debt in the high yield market tend to have lower default rates, so there is actually no correlative relationship between more debt and higher risk. The analysis is from S&P Global Market Intelligence.

FINSUM: This is very useful analysis, because the more debt = more risk fallacy is an easy-to-fall-into mental trap.

(New York)

Investors need to be worried about the amount of corporate debt out there. Over the last decade, companies have binged on corporate debt to the tune of $14 tn of issuance. Total US corporate debt from nonfinancial companies is now 74% of GDP, its highest ever. And total corporate leverage is now 20% higher than before the Crisis. On the back of this, Goldman Sachs says that so far this year stocks with the strongest balance sheets have been outperforming weaker ones considerably. Here are some companies to look at to protect one’s portfolio from a crunch: Mastercard, Electronic Arts, Equity Commonwealth (a REIT), Graco, and Verizon.

FINSUM: The amount of corporate debt is quite alarming, and it does seem like there will be a reckoning. But when? As long as earnings stay strong, it seems unlikely there will be a big blow up.