Save your cookie preferences

We use cookies to remember your site preferences, record your referrer and improve the performance of our site. For more information, see our cookie policy.

Please select an option below and 'Save' your preferences.

Save

You can update your cookie preferences at any time from the 'Cookies' link in the footer.

We use cookies (including third-party cookies such as Google) to remember your site preferences and to help us understand how visitors use our sites so we can improve them. To learn more, please see our privacy policy and our cookie policy.

To agree to our use of cookies, click 'Accept' or choose 'Options' to set your preferences by cookie type.

Options Accept
BullionVault

CHARTS

  • English
  • Deutsch
  • Español
  • Français
  • Italiano
  • Polski
  • 日本語
  • 简体中文
  • 繁體中文
  • Daily audit
  • Help
  • Contact
  • Deposit
  • Login
  • Open account
  • ABOUT US
    • About BullionVault
    • In the press
    • Reviews
    BUY/SELL BULLION
    • Vaulted gold & silver
    • -Live order board
    • -Daily Price
    • Coins for delivery (UK)
    INVESTMENT GUIDE
    • Guide to gold
    • -How to buy gold
    • -Gold investment
    • -Gold investment plan
    • -Investment insurance
    • -Compare asset performance
    • Guide to silver
    • -How to buy silver
    • Guide to platinum
    • -How to buy platinum
    GOLD NEWS
    • Gold news front page
    • -Gold price news
    • -Opinion & analysis
    • -Market fundamentals
    • -Gold/Silver Investor Index
    • -Infographics
    CHARTS
    • Gold price
    • Silver price
    • Platinum price
    • Price alerts
  • Login
  • Open account
  • BUY/SELL BULLION
  • Vaulted gold & silver
    • ⤷
    • Live order board
    • Daily Price
  • Coins for delivery (UK)
  • INVESTMENT GUIDE
  • Guide to gold
    • ⤷
    • How to buy gold
    • Gold investment
    • Gold investment plan
    • Investment insurance
    • Compare asset performance
  • Guide to silver
    • ⤷
    • How to buy silver
  • Guide to platinum
    • ⤷
    • How to buy platinum
  • GOLD NEWS
  • Gold news front page
    • ⤷
    • Gold price news
    • Opinion & analysis
    • Market fundamentals
    • Gold/Silver Investor Index
    • Infographics
  • CHARTS
  • Gold price
  • Silver price
  • Platinum price
  • Price alerts
  • ABOUT US
  • About BullionVault
  • In the press
  • Reviews
  • Help
  • Contact
  • Daily audit
    • English
    • Deutsch
    • Español
    • Français
    • Italiano
    • Polski
    • 日本語
    • 简体中文
    • 繁體中文

Gold News

Live support

NEED HELP? ASK US NOW

Search form

Gold News front page

Gold Price News

Gold Prices Dead-Flat Ahead of the Fed, But 2020 Volatility Bets Jump

More...

Gold Investing In Depth

Learn about gold bullion bars

Learn about gold bullion coins (and costs)

Gold investment: Why & how?

Gold Investment Analysis

  • Latest Gold Investor Index
  • Diversification: Gold as investment insurance
  • 40-year Asset Performance Comparison Table

Gold Articles

Opinion & Analysis

Gold Price News

Investment News

Gold in History

Gold Books

Gold Investor Index

Gold Infographics

Archive

  • December 2019 (10)
  • November 2019 (34)
  • October 2019 (36)
  • September 2019 (29)
  • August 2019 (23)
More...

List of authors

Where's Yellen When Junk Needs Her?

Thursday, 11/22/2018 09:01

Trouble in bonds gets worse...

IS THIS the beginning of the end for bond markets? asks John Stepek, MoneyWeek's executive editor, in his free daily investment email Money Morning.

"The slide and collapse in investment grade credit has begun".

That was a pretty unequivocal tweet from Scott Minerd of Guggenheim Partners this month.

Minerd was referring to the slide in the value of General Electric's bonds. The conglomerate has a whopping $115bn of debt, and has lined up asset sales worth as much as $40bn to pay it off.

It remains to be seen if GE can pull it off. But as Minerd notes, GE is far from the only troubled company out there.

Investment grade corporate debt has fallen by about 3.5% in value this year, according to Bloomberg. If you're more accustomed to investing in stocks, that sounds pretty unimpressive. That's nothing more than a bad day at the office for an equity investor.

But in fact, that's the worst year for investment grade corporate bonds since 2008. Back then the market shed nearly 5%. Again, it may not sound that scary. But back then, markets were bailed out by being in a deflationary environment (good for bonds overall) and also because the central bank stepped in to make sure no one could go bust.

Those comfort blankets may have been removed now. And that's one reason why the market is starting to act up.

The most specific weak spot right now is the junk bond (also known as "high yield") market. Oil and gas companies are among the biggest issuers of junk-rated debt (debt which is considered at high risk of potential default) in the market right now, accounting for about 15% of the market. The only sector with more debt is media.

The plummeting oil price – both Brent crude and the US benchmark, WTI, are now in bear markets – has hit sentiment hard. Falling oil prices are bad for oil company profitability, which in turn makes their debt riskier.

So for example, the biggest high-yield exchange-traded funds (ETFs) in early November suffered their worst falls since early February, which is when the markets had their last significant panic. And the iShares high-yield ETF hit its lowest level since June 2016.

We saw something similar to this when the oil price crashed back in 2014. Everyone started to fret about what would happen if oil companies started to go bust.

At the time, the big fear was that there would be some sort of systemic knock-on effect. I felt that this was unlikely. Everyone gets worried about "systemic" problems because that's what happened at the last financial crisis.

But oil company debt doesn't pose an obvious systemic risk. The people who own it, know that they own it. And they mostly understand that it's risky. It hasn't been bundled up and repackaged as a AAA-credit rated US Treasury substitute.

As it turned out, the last time this happened, oil companies continued to be able to roll over their debt in most cases, because lending was still free and easy. So everything ended up being just fine.

Is that what'll happen this time? It'd be nice to think so, but I think the risks are higher today.

The most obvious difference between now and 2015 is that the US no longer has a sympathetic Federal Reserve chairman in the form of Janet Yellen. Today, the Fed is much less inclined to step in with the soothing balm of potential interest rate cuts.

That's because we're no longer in a deflationary environment. Markets can't quite bring themselves around to the idea of this, but the Fed genuinely does now see inflation as the enemy. Given that US interest rates are still very low in "real" terms – ie, when adjusted for inflation – the Fed sees no reason to back off yet.

So what are the likely outcomes here that might turn this around? The Fed might at some point, relent. But markets would probably have to fall further from here. Jerome Powell knows that he'll be tested and I think he'd rather call the market's bluff for a while rather than roll over at the first sign of a double-digit drop in the US market.

The other option – which I think might be more likely – is that we see oil prices perk back up. That in turn could give the high-yield market a reason to rally.

Yet, whatever happens, it's hard to see how life is going to get any easier in the mid-to-long term for junk bonds.

The only way that junk bonds can do okay in a rising rate environment is if rates are rising because of strong economic growth. If that's the case, then the discomfort of rising rates is offset by the stronger economic backdrop (which lowers the risk of default).

But if rates are rising because inflation is perking up, but growth is still mediocre, then that's not good news for junk bonds. Your real return falls and your credit risk goes up.

And if the opposite happens – we end up returning to a recessionary environment in which the Fed feels the need to cut rates or go easy on them, you've still got the problem of rising default risk.

In short, if you currently own a significant holding of junk bonds in your portfolio, I'd advise you to take a close look at your rationale for doing so.

  • Reddit logo
  • Facebook logo
  • Twitter logo
  • Google logo
  • Yahoo logo
  • LinkedIn logo
  • Digg logo
  • StumbleUpon logo
  • Technorati logo

Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News, RSS links are shown there.

Follow Us

Facebook Youtube Twitter LinkedIn

 

Mobile apps

 - live trading 24/7

 - buy & sell instantly

 - up-to-the-second charts

 

 

 

Daily news email
Go to 'communications settings' 

Get the latest daily gold price news free by email

Latest gold news by email

 

 

 

Investor Index
5 November 2019

Gold Investor Index

Gold's 7-year record

 

 

 

Deutsche Welle
3 June 2019

DW

East Asia gold standard?

 

 

 

LBMA's Alchemist
29 July 2019

Alchemist 94

Cental-bank gold since '99

 

 

 

IG TV on Reuters
10 September 2019

IG TV

Brexit's UK gold boom

 

 

 

  •  Email us

Market Fundamentals

  • Gold Mining's Mega-Merger Output -10% as M&A Eats Exploration Spending
  • Silver Investing 'Healthy', Still 40% Shy of Peak
  • Gold Bars Rise to Premium in India as Bullion Imports Sink
More...
  • Cost calculator
  • Cookies
  • Terms & conditions

©BullionVault Ltd 2005-

  • Twitter
  • Facebook
  • LinkedIn
  • YouTube