19/12/18: Debt-Debt-Baby: BBB-rated & lower 'bump'

Gradual deterioration in the quality of corporate debt traded in the markets has been quite spectacular over 2018:

The above chart shows that at the end of 3Q 2018, the market share of BBB and lower-rated corporate  credit is now in excess of 50%, in excess of USD4.4 trillion, matching prior historical record set at 4Q 2017-1Q 2018. BIS' Claudio Borio was quick out on the rising risks: https://www.bis.org/publ/qtrpdf/r_qt1812_ontherecord.htm, saying "...the bulge of BBB corporate debt, just above junk status, hovers like a dark cloud over investors. Should this debt be downgraded if and when the economy weakened, it is bound to put substantial pressure on a market that is already quite illiquid and, in the process, to generate broader waves. ... What does this all mean for the prospects ahead? It means that the market tensions we saw during this quarter were not an isolated event. ... Faced with unprecedented initial conditions - extraordinarily low interest rates, bloated central bank balance sheets and high global indebtedness, both private and public - monetary policy normalisation was bound to be challenging especially in light of trade tensions and political uncertainty. The recent bump is likely to be just one in a series."

You can read my views on the latter aspect of the markets dynamics in the post that will follow.

29/6/18: Debt Bubble: Staying the Course into Hurricane

In three and a half years, the world debt has gone from being a worry to a bubble. At the end of 2014, there were just under $44 trillion worth of corporate and government debt on issue with roughly 1.4 percent of these yielding negative rates. As of June 2018, there are now more than $49 trillion worth of corporate and public sector bonds in the markets, with ca $8 trillion of these (or 16 percent) trading at negative yields.

And this is just a part of the overall debt bubble picture. In April this year, the IMF report noted that non-bank funding for households and wholesale lending "is on the rise since the Lehman-crisis, and constitutes a major source of bank credit to the economy" (see https://www.imf.org/en/Publications/WP/Issues/2018/03/19/Leverage-A-Broader-View-45720). IMF estimates for non-bank funding for the U.S. banks alone, shown below, add $11.7 trillion to the debt system in 2016, against $10 trillion in 2008. Meanwhile, another roughly $8 trillion worth of non-bank debt is sitting in the dealer funds and hedge funds' pledged collateral exposures.

Meanwhile, in the U.S. alone, $6.3 trillion corporate debt bubble is now at a risk of rising interest rates. U.S. speculative-grade corporate borrowers are now at a new record-low cash-to-debt ratio of just 12 percent, below the 14 percent in 2008. Worse, per S&P report, more than 450 investment-grade companies that are not in the top 1 percent of cash-rich debt issuers, have highly risky cash-to-debt ratios of around 21 percent.

29/3/18: Credit downgrades and the sunny horizons of peak growth

The global economy is picking up steam. The U.S. economy is roaring to strength. 2018 is going to be another 'peak year'. Tax cuts are driving equity valuations up. Corporate balance sheets are getting healthier by a day... and so on.

The positivity of recent headline has been contrasted by the realities of the gargantuan bubble in corporate debt. A bubble that is not going to get any healthier any time soon. In fact, based on the latest data (through 4Q 2017) from the S&P Global Market Intelligence, H1 2017 trend toward relatively balanced (or rather relatively moderately negative skew) credit ratings has turned decisively negative in 2H 2017. Worse, 4Q 2017 dynamics were markedly worse than 3Q 2017 dynamics:

Which brings up the following question: if things are getting downgraded that fast, what's likely to happen with the Fed policy 'normalization' impact on the corporate credit markets? Answers on tears-proof napkins, please.