INSUBCONTINENT EXCLUSIVE:
By Lu Wang and Sarah PonczekIf there’s one thing the prophets agree on, it’s that the end will come in the bond market
Even for stocks.
Prophesies of doom are everywhere
There’s billionaire investor Stan Druckenmiller, who says our “massive debt problem” will ignite a crisis
Oaktree Capital’s Howard Marks warns that public and private debt will be “ground zero when things next go wrong.” And Citadel’s Ken
Griffin, who sees a binge ending badly.
If you’re an equity investor, all the hectoring has probably left you frazzled, staring anxiously
at fixed-income markets for early signs of the apocalypse
So it’s no mystery why the sight of 10-year Treasury yields spinning higher at the fastest rate in two years was enough to send the SP 500
to its worst two-day tumble since May.
“There are a lot of people waiting for the world to end because of this bond market,” said Brad
McMillan, chief investment officer for Commonwealth Financial Network, which oversees $156 billion
“Low rates will keep going forever -- a lot of justification for high valuations is based on the assumption
That assumption is largely broken.”
To be sure, the biggest weekly decline in a month for the SP 500 wasn’t that big -- just 1 per cent
Which is testament to how hard it’s been to worry stock traders
If this episode is different, if it rises above past threats that couldn’t lay a glove on stocks -- trade wars, emerging economy
implosions -- it’s because it has its root in something investors have trouble brushing aside: credit.
Any number of bond market
hypotheticals are capable of terrifying stock bulls
They pertain to the startling amount of credit swirling around the US economy -- and the possibility it will turn sour
The government’s budget deficit has swelled, contributing to the country’s debt load, now at $21.5 trillion.
Meanwhile, corporate
America has gone on a borrowing spree to take advantage of near-record low rates
Excluding financials, SP 500 companies have more than doubled their borrowings to $5 trillion over the past decade, data compiled by
Bloomberg show.
Should interest rates rise and growth slow, companies are bound to see to their financial soundness deteriorate
More than $1 trillion of investment grade corporate bonds could be cut in the next downgrade cycle, according to analysis this week by
Morgan Stanley.
“Leverage is near all-time highs, and companies used tax reform proceeds for buybacks instead of paying down debt,” said
Max Gokhman, head of asset allocation for Pacific Life Fund Advisors, which manages $40 billion
“More than triple the debt that came due in 2018 will be due each year from ’19-’21
If yields go up, there’s real concern about companies’ ability to reissue and keep their leverage.”
For now, pain in stocks has been
The SP 500 is 1.5 per cent from a record reached Sept
Dig a little deeper and there are signs credit concerns are being felt
A basket of companies with stronger balance sheets compiled by Goldman Sachs Group Inc
is up 12 per cent since December, compared with 6 per cent for the weaker group.
It’s a departure from the early part of this bull market,
when financially less stable firms consistently beat their sturdier counterparts
During the eight years from March 2009, the weaker cohort topped the stronger by 10 per centage points annually.
One thing that clearly
bothers equity investors is how quickly turbulence broke out in fixed-income markets.
The Merrill Lynch MOVE Index tracking Treasury
volatility rose almost 20 per cent this week, the biggest jump since 2015
Yields rose across the curve on the back of strong US economic data and hawkish comments from Federal Reserve Chairman Powell, forcing
equity investors to reevaluate the higher rate environment.
The Russell 2000 index of small-caps, where unprofitable companies have
ballooned under the cover of rock-bottom borrowing costs, fell 3.8 per cent over the week, the most since March
It’s down three weeks in a row, the longest streak of losses since November 2017.
‘‘You definitely have to look at the capital
structure of all the companies you invest in,” Jeanie Wyatt, founder and chief investment officer of South Texas Money Management, which
manages $3.8 billion, said by phone
“How much debt do they have, how much of it is short-term That becomes critical.”
