Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Panic Is Spreading, Part 1: Surge in Junk Bond Defaults Imminent

Interest-Rates / US Bonds Sep 30, 2015 - 12:15 PM GMT

By: John_Rubino

Interest-Rates

One of the early signs that a cycle is about to turn down is disorder in junk bonds. That’s because the companies that issue such bonds are by definition financially and/or operationally weak and therefore ultra-sensitive to changes in their environment. A modest drop in, say, consumer spending or the price of wind turbines will hardly be noticed by an Apple or GE but might threaten the survival of those companies’ weakest competitors. And as credit bubbles inflate, the weak in every field tend to proliferate as overexcited bankers and bond funds offer them plenty of rope with which to hang themselves.


So when such bonds start falling — which is to say when their yields start rising — that’s a sign of broad-based trouble ahead. From Tuesday’s Wall Street Journal:

Today’s Big Number: 15.7% of high-yield bonds trading at distressed levels

The commodity -price crunch fueled by China’s economic slow-down is taking a toll on the bond market.

Bonds from debt-laden companies in the metals, mining and steel industries are driving up distress ratios, an indicator that a wave of debt defaults could be on the horizon.

As of mid-September, nearly 15.7% of the roughly 1,720 bonds rated below investment grade traded at distressed levels, the biggest share since 2011, according to Standard & Poor’s Ratings Services. Such bonds were trading with yields at least 10 percentage points over comparable U.S. Treasurys. Yields on bonds rise when prices fall.

Companies with distressed bonds may not be able to refinance or access other forms of capita, said Diane Vazza, an S&P managing director.

The numbers suggest that many companies could default in the next seven to nine months. “There’s a very strong correlation” between bonds that fall into the distressed category and defaults, she said.

It’s not surprising that the commodities crash would impact the bonds of coal and oil companies. The big question is whether the carnage spreads to other kinds of junk. And over the last couple of months it has. The chart below shows the price of a junk bond ETF that last week plunged through the lows of the August mini-panic.

Wolf Richter and Zero Hedge just posted long, insightful pieces on this subject. See, respectively, This is When Bonds Go Kaboom! and BofA issues dramatic junk bond meltdown warning.

The short version of the story is that if things play out as they have in past down-cycles, junk defaults will spike from here and capital will flow out of this and other volatile markets and into the safest havens, which historically have been high-grade government bonds, the shares of rock-solid, non-cyclical companies, and, frequently, precious metals.

Governments, meanwhile, will respond with lower interest rates, big deficits and tax cuts. Which is where our story departs from the standard script: With money already extremely easy in most places and sovereign debt at record levels, the government response will have to be either non-traditional or numerically extreme. That is, negative interest rates and helicopter money. So today’s junk implosion differs from those of 1990, 2000 and 2007 not in itself but in the changes it might set off in the broader economy.

By John Rubino

dollarcollapse.com

Copyright 2015 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in