Executive Intelligence Review


Corporate Debt Crash Warnings Get Louder, as Stocks, Bonds Fall

Nov. 20, 2018 (EIRNS)—A succession of warnings of a blowout of the $3.5 trillion corporate “leveraged loan” markets, is coinciding with an accelerating international slide in stock markets, and with a sharp deceleration of economic growth across Europe and the United States.

The very high-level warnings began with the Bank for International Settlements in its annual report released in July. That was followed by the Bank of England in October—at a time when its Governor Mark Carney again cautioned that a “hard Brexit” could really destabilize the financial derivatives markets—and then by the IMF’s explicit warning of deteriorating corporate bond markets on Nov. 12 in the “IMF Blog.” Sen. Elizabeth Warren on Nov. 14 wrote to the five main U.S. bank regulators: “I am concerned that the large [corporate] leveraged lending market exhibits many of the characteristics of the pre-2008 subprime mortgage market.” And Janet Yellen, the former chair of the Federal Reserve, had given an interview posted Oct. 25 to the Financial Times pointing to a “huge deterioration” in lending standards in the leveraged loan markets. She warned that these loans could soon bankrupt a large number of companies, making an economic downturn into something much worse. She said,

“You are supposed to realize from the [2008] crisis: It is not just a question of what banks do that imperils themselves, it is what they do that can create risks to the entire financial system.”

Although $1.5 trillion in corporate leveraged loans have been issued just in 2017-18, and the market in the United States has zoomed up to $1.3 trillion, current U.S. regulators have said nothing about this. But since Oct. 1, the interest rates in the junk debt markets (leveraged loans, junk bonds) have finally started to jump. the average rate in the Bloomberg Barclays U.S. Corporate High Yield Total Return Index has risen from 6.2% to 7.2% in those 45 days. The lower grades of junk debt, like “CCC,” have risen on average from 8.8% to 10.8% in the same period.

That means the funds leaving trans-Atlantic stock markets as they fall, are not entering the bond markets, but heading for the financial-distress “safe have” of the huge U.S. Treasury market—there, interest rates have dropped nearly 0.25% in a month. Falling stock values are being led down by the FAANG (Facebook, Apple. Amazon, Netflix, Google) tech stocks, despite these companies buying up their own stock at record rates, $115 billion worth from January to September by these five alone.

Underlying this incipient crash, the American underlying economy has now joined those of Europe in slowing down. U.S. industrial production, growing by 0.4%/month in June, has slowed for four straight months, to 0.1% growth in October. U.S. real wages turned back down in October. For production and non-supervisory workers, both average hourly and average weekly wages fell in real terms by 0.1% in October. And housing is slumping; building of single-family homes has dropped for three consecutive months through October, as have building permits. Sales of single-family homes have also been dropping through the Fall. Years of 5.5-6.0% home price inflation and 2-3% wage/salary growth have produced an “affordability problem,” which with mortgage rates suddenly at 5% has become an “affordability crisis.”