Investors who are worried that the stock market rally has gone “too far, too fast” and seek a “safe haven” in the bond market may want to think twice.
The reason why is that the credit market appears highly precarious. First, with rates at historic lows, even a modest rise in rates will rapidly reduce the value of bonds. Indeed, this is already occurring.
Also, here’s a chart and another reason why:
According to Bloomberg, there is [a] large cohort of companies that earn less than their total interest expenses. In all, this group comprises one fifth of the largest publicly traded companies and owes a record $2 trillion, 30% more than the total of 2008 and double that of last year. Two household names on the list are Carnival and Exxon Mobil.
Cheap credit abetted by Federal Reserve bond buying has kept these firms alive, but there is a reason that analysts refer to them as zombies: “They face insolvency without policy markers’ support.” So, historically low interest rates and record fiscal and monetary stimulus have not been enough to stem a record number of firms with profits below debt servicing costs.
What’s already been stated raises enough red flags, yet you may be also interested in knowing that among U.S. companies with more than $50 million in liabilities, 244 filed for bankruptcy in 2020, the most for a year since 2009.
Even so, junk bond yields are at record lows, and yields on ultra-junk, the lowest tranche of junk, are at multi-year lows.
This epic complacency in the context of burgeoning bankruptcies and zombie companies, places bond buyers at high risk.
Here’s an update on that credit market complacency reflected in this Jan. 15 headline from U.S. News & World Report: “Bond Market Outlook: Yields Likely to Stay Low in 2021”
This complacency extends beyond the borders of the U.S.