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There Have Never Been So Many Bonds That Are Almost Junk

By October 12, 2018No Comments

That was the name of a recent article that appeared in the Wall Street Journal.  The amount of BBB rated bonds, the lowest investment grade rating before junk status, has been growing as a % of the overall bond market.

As you can see from the charts above, overall value of US corporate debt has grown incredibly since the financial crisis as low interest rates enticed a borrowing binge.

The next downturn could be more painful than usual for creditors, with knock-on effects for shareholders.  Credit markets send two classic signals: The first shows excessive risk taking, when companies pay very little above Treasury bonds—as in the late 1990s and 2007, and again today.

Furthermore, the scale of the debt at risk of downgrade to junk is already frighteningly high, despite decent economic growth. Hans Lorenzen, a credit strategist at Citigroup, calculates that just the weakest BBB-rated bonds with a negative outlook or on review for downgrade, plus those where the issuer has other junk-rated bonds, amount to about half the existing size of the $1 trillion U.S. junk market.

There are many warning signals flashing right now and this just happens to be another one and another data point which points to caution.


Best Regards,

Jared Toren
CEO & Founder

Source: Wall Street Journal

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