Corporate bonds are selling off as investors grow alarmed with the possibility that the Federal Reserve this month will raise interest rates for the first time in 10 years, making borrowing more expensive.
“Concerns over the possible impact of a US interest rate increase on more vulnerable borrowers has been exacerbated by rising indebtedness and shrinking revenues among companies,”
according to the Financial Times. “This has fueled concerns that the profitable ‘credit cycle’ that has reigned since the financial crisis receded is coming to an end.”
Swiss bank UBS last week that as much as $1 trillion of junk-rated corporate bonds and loans may have trouble being refinanced at a higher borrowing cost.
“It is our humble belief that the consensus at the Fed does not fully understand the magnitude of the problems in corporate credit markets and the unintended consequences of their policy actions,” Matthew Mish, a UBS strategist, wrote in a note to investors.
Safer corporate bonds judged “investment grade” by Standard & Poor’s, Moody’s or Fitch have been reasonably steady, with average yields dipping slightly again after a faltering start to November, the FT says. Debt rated below that threshold has suffered, particularly in the energy industry, which is confronting collapsing oil prices.
“People are going to be carried out on stretchers,” Laird Landmann, a senior bond fund manager at TCW, told the FT. “When earnings are coming down, leverage is high and interest rates are going up. It’s not good.”
Stock Investors Should Worry
A collapsing junk bond market can signal problems for stocks, as it did earlier this year. The spread between junk-bond yields and less riskier Treasurys expanded from June through August, right before the stock market suffered its first 10 percent correction in four years.
“The declines are worrying Wall Street because junk-market declines have a reputation for foreshadowing economic downturns,”
according to The Wall Street Journal. “Junk bonds are lagging behind U.S. stocks following a debt selloff in the past month. The S&P 500 has returned 3.6 percent on the year, including dividends.”
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