Variant Perception reports US Corporate Debt Near Records, Credit Spreads to Widen. Lets take a look
The present calm in high-yield markets is entirely unwarranted and at odds with where we are in the US credit cycle. Corporate debt to GDP in the US is at all-time highs. In the past, whenever corporate debt reached around 42-45% of GDP, the US approached a recession. Today rates are lower, but corporate debt is already above 45% of GDP. Some investors prefer to look at net debt minus liquid assets, but even there, the measure is higher than in 2001 and 2008 (also the top 50 companies hold two thirds of all cash, so aggregate figures are highly misleading).
Every single leading indicator we have points to wider credit spreads. It doesn’t matter if you look at accounting relationships (cash flow to debt, capex to EBIT) or economic relationships (corporate debt-to-GDP, lending growth YoY), or market relationships (yield curves flattening). The message is wider spreads are inevitable.
US Corporate Debt
Credit Spreads Expected to Widen
- Fed Like a “Cowardly Scarecrow” as Corporate Debt Bubble Expands
- Reader Asks “Why Would Equities Sink in a Bond Market Dislocation”?
Mike “Mish” Shedlock
Mike Newman said:
I also think this is a glaring chart (in link below) showing the deterioration of S&P 500 stocks credit ratings by decile over the last decade. 1=AAA down to 10=BBB-
Corporate credit quality is based on the quantity of donations to the Clinton Foundation,,,not some fundamental rating agency diatribe.
Can someone please explain “credit spreads?”
Relatively low risk bond’s yields and high risk bond yields get wider indicating that buyers of bonds are reassessing high yield bonds to be an even higher risk requiring more mitigation.
My bet, oil and auto loans are threatening default. Watch S&P 500 high yield lead the downward procing.
Anyone still confused why CB’s are now buying corporate paper? This nonsense has been going on in Europe a while now. Just starting here apparently. Or we can let a debt deflationary default cascade start here by not buying up bad paper. Nah!
What will have more risk – bankrupt govt debt that’s backed by eroding faith and confidence, or blue chip corporates backed by tangible assets and intellectual capital, with no history of defaults? The future will not be like the recent past.
With ZIRP or negative interest, corporations don’t actually need to produce anything profitable. They can just borrow newly printed credit to buy back shares for executive ESOPs, and borrow to pay dividends to placate shareholders. Its a way for corporations to get in on bankers’ propensity to confiscate stuff, and put the loot in banker pockets. Some of the loot that bankers confiscate is now going to executives and shareholders.
Since corporations don’t have to produce anything, they are not bothering to invest in much new production. Because bank printing has removed accurate supply/demand data from prices, the scant investing that does take place is often misallocated. The economy spirals toward banana republic status.