Consumers aren’t the only ones defaulting on their debts: Corporate bond defaults were up massively in 2023, especially for high-risk junk debt, and the trend is continuing this year at a pace not seen since the 2008 global financial crisis. Unsurprisingly, companies selling low-rated junk debt are being hit the worst.
After a delicate dance of interest rate increases, Jerome Powell has declared victory on inflation and says to expect looser monetary policy this year. But with junk bond spreads not widening nearly as much as one would expect during an era of economic tightening, you’ve got to wonder if money is still actually looser than the Fed’s last round of hikes would lead you to believe.
The Federal Reserve pulled off a magnificent manipulation of the junk bond market, facilitated a massive wealth transfer from savers to speculators, pocketed millions of dollars, and then washed its hands of the matter.
In March 2020, as governments shut down the economy for coronavirus, the Fed slashed interest rates and launched a massive quantitative easing program. But that wasn’t enough, so the central bank took the unprecedented step of announcing it would purchase $750 billion in corporate bonds, junk bonds, bond exchange-traded funds (ETFs), and junk-bond ETFs.
Last month, we reported on troubling signs in the corporate bond market. According to Moody’s, the majority of US companies have a “speculative” credit rating. They are considered high risk. As a result, their debt is “high yield” or “junk. When you combine leveraged loans and junk bonds, the total level of “junk” debt in the US marketplace comes in at around 37%.
In a recent article, investment guru and economic analyst Jim Rickards said we may soon face a devastating wave of junk bond defaults.
The next financial collapse, already on our radar screen, will quite possibly come from junk bonds.”
We’ve written a lot about government debt and warning signs in the Treasuries market. The US government needs to sell over a trillion dollars in bonds a year over the next few years to finance its skyrocketing deficit. Who exactly will buy all of these government bonds remains unclear and the impact on interest rates could send shockwaves through the entire US economy.
Equally troubling, but less often discussed, are the risks piling up in the corporate bond market.
