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Corporate Debt Bubble: The Junk Is Starting To Get Thrown Out

Nov. 18, 2017 (EIRNS)—The U.S. corporate and "emerging market" junk debt markets have started to buckle in November, with European corporate junk next to go.

The superinflated prices in the nearly $3 trillion "junk debt" part of the $14 trillion U.S. corporate debt bubble—the part which grew by a startling $800 billion in the last year—is unable to withstand even the small and slow interest rate increases being dripped into the financial system by the Federal Reserve.

In the past week average yields jumped up to 3.8% from 3.3% in U.S. junk; a near-record $6.7 billion flowed rapidly out of junk bond investment funds, according to today's Wall Street Journal. The paper quotes one analyst, "We’re seeing huge outflows from mutual funds and ETFs, so it’s triggering this domino effect." In the telecom sector, which has about $400 billion of this debt, average interest rates rose faster, from 5.2% to 6.4%, and one big such debtor, Sprint, is increasingly likely to default. Another large junk bond issuer, the Noble Group, had its rating changed to "probable default." The Financial Times posted an article Nov. 15 headlined "Contagion worries rise after junk-bond sell-off." Ambrose Evans-Pritchard in the Telegraph pitched in Nov. 16, that "the top of the astonishing post-Lehman boom in corporate credit has been reached." He says that now "the credit markets have sharp antennae, and they are up."

Former Reagan budget director David Stockman, in his "Contra Corner" blog on Nov. 14, started with the astonishing fact that European junk corporate debt, two weeks ago, reached an average interest rate of 2%, below that of U.S. 10-year Treasuries. Stockman called this an incredible artifact of continuous money-printing of the European Central Bank’s continuing "quantitative easing" program. European junk debt is about $2.5 trillion total. But with interest rates half those of the same corporate junk in U.S. markets, Stockman says this bubble, after reaching bond prices as inconceivably high as the home prices and mortgage bonds of 2006-07, is ready to crash.