Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

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