Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

The Corporate Debt Bubble Is Strikingly Similar to the Subprime Mortgage Bubble

Interest-Rates / Corporate Bonds Feb 18, 2019 - 06:03 PM GMT

By: John_Mauldin

Interest-Rates

By Robert Ross : “Housing prices in the US never go down.”

Just about everyone in America believed that in the mid-2000s.

A limited amount of buildable land and a growing population would keep housing demand strong.

So, house prices will continue to rise.

That was the thinking, anyway.

Even some of America’s brightest minds—like former Federal Reserve Chairman Alan Greenspan—jumped on the stable housing bandwagon.


It was unthinkable that the housing market could crash.

Then, the subprime mortgage crisis hit.

Never Say Never

When people or companies load up on too much debt—especially low-quality debt—it can lead to a crisis.

When I say low-quality debt, I mean riskier loans that have a higher possibility of not being paid back.

That’s exactly what happened during the subprime mortgage crisis.

“Subprime” was just a gentler way of saying riskier debt.

The US financial crisis that started in 2007 was triggered by the bursting of the US housing bubble.

However, this bubble formed because of weak lending standards and cheap, low-interest loans.

This let too many people borrow too much money to buy homes they really could not afford.

This tidal wave of low-quality debt would eventually crash the housing market and threaten the survival of the banking system.

What had been unthinkable a few years earlier had become a stark reality.

Rising Low-Quality Debt Is a Canary in the Coal Mine

From 2004 to 2006, subprime mortgages grew from 8%—near the long-term average—to 20% of the total mortgage market.



Then the housing bubble burst in 2007.

From January 2007 to March 2009, the average home price fell 20%.

The US sank into its deepest recession since the Great Depression.

And it all came back to one thing: too much low-quality debt.

History Does Rhyme

This same explosion in low-quality debt is happening in another corner of the US debt market.

I’m talking about BBB-rated corporate bonds.

And just like the housing market, people think this market can never go bust.



Since the end of the financial crisis, the triple-B corporate bond market has grown to twice the size of the subprime mortgage market.

This market is an accident waiting to happen.

An Epidemic of Shaky Debt (Again)

Corporate bonds are debt issued by companies. It’s a way for companies to raise money, and the money must be paid back. Almost every company in the world uses the corporate bond market.

But just like the subprime mortgage market, it’s the poor quality of the debt that’s the problem.

Corporate bonds are rated by credit agencies like Moody’s, S&P, and Fitch. A bond is considered investment-grade if it’s rated between AAA and BBB-.

The closer to triple-A, the safer the bond.

But according to Morgan Stanley, the US has been flooded with BBB-rated bonds. That is the lowest a bond can be rated and still be considered investment grade.

In just the last 10 years, the triple-B bond market has exploded from $686 billion to $2.5 trillion—an all-time high.

To put that in perspective, 50% of the investment-grade bond market now sits on the lowest rung of the quality ladder.

And there’s a reason BBB-rated debt is so plentiful.

Too Much Low-Quality Debt Will Break the Market

Ultra-low interest rates have seduced companies to pile into the bond market.

Corporate debt has surged to heights not seen since the global financial crisis:



Source: Wall Street Journal

But as I’ve covered here in The Weekly Profitinterest rates have risen significantly.

Since July 2016, the interest rate on the 10-year Treasury note has doubled.

And the value of corporate bonds is tied to government bonds.

When rates on government bonds rise, it makes investment-grade corporate bonds less attractive. This is especially true for bonds on the lower tiers such as BBB-rated bonds.

That’s how the bond market works. Bonds sold today with a higher interest rate make yesterday’s lower-rate bonds lose value. So, higher-rated bonds are a better deal for investors.

And that’s bad news for the companies issuing lower-rated bonds.

BBB-Rated Bonds Have a Target on Their Backs

In a recession, BBB-rated bonds are the most vulnerable of all investment-grade bonds.

According to Moody’s, 10% of BBB-rated corporate bonds become what’s known in the industry as “fallen angels” in a recession.

That’s a tactful way of saying they’ve been downgraded to “junk” status.

The explosion in the number of BBB-rated bonds guarantees that we will see more fallen angels than ever before during the next recession.

And when that happens, investors that own BBB-rated bonds are going to get badly hurt.

I’m not the only one saying this. I have some pretty good company.

Former Federal Reserve Chair Janet Yellen thinks corporate debt levels are “quite high.”

She also thinks high corporate debt could prolong a downturn in the economy and lead to lots of bankruptcies.

This market is a ticking time bomb.

And as this bomb blows up, you want to hold assets that can weather the downturn.

The Sin Stock Anomaly: Collect Big, Safe Profits with These 3 Hated Stocks

My brand-new special report tells you everything about profiting from “sin stocks” (gambling, tobacco, and alcohol). These stocks are much safer and do twice as well as other stocks simply because most investors try to avoid them. Claim your free copy.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules