Lashed by trade wars, monetary angst and the tech wreck, besieged stock investors could be forgiven for seeing enemies wherever they look. Right now they’re fretting one that has a track record of presaging economic gloom.
But for all the mounting anguish over corporate bonds screaming a warning on growth, there’s scant evidence this is “the big one” for global markets, according to a string of investors and analysts. They argue credit is simply moving in sympathy with febrile sentiment in stocks, while default rates and risk premiums remain in check.
“We see this as a buying opportunity,” wrote Mark Holman, the chief executive officer of TwentyFour Asset Management, who is pouncing on the sell-off to add shorter-dated debt. “We don’t believe the end of the cycle is upon us just yet.”
That will be a welcome message for beleaguered equity markets, where investors have been navigating the fallout of higher rates, a correction in once red-hot technology shares and aggressive U.S. trade policies. The alternative -- a sustained debt move -- would be a reality check for Corporate America’s post-crisis debt binge, tightening broader financial conditions along the way.
Outlook Intact
Investment-grade bonds are now on track for their worst year since 2008, after spreads for companies with both the strongest and weakest balance sheets widened by the most since 2016 this week.
Yet U.S. growth remains above its longer-term trend and “spreads have widened only moderately,” Goldman Sachs Group Inc. analysts including Jan Hatzius wrote in a Nov. 20 note. And while absolute debt loads remain high, companies are still making more than enough money to service their debt.
“I don’t care how smart it sounds to say ‘credit is leading the way,’ ” Peter Tchir, head of macro strategy at Academy Securities, wrote in a note this week. “It just isn’t correct.”
Instead, the take-away in this week’s market action may be more prosaic: That once-submissive credit buyers are finally telling Corporate America to rein-in its post-crisis debt binge. Companies have jumped on the post-crisis debt boom to term out debt, reducing refinancing risks in the near term.
The message echoes that of stock investors, who have punished the weak and rewarded the strong even as junk investors were happy with slim premiums. S&P 500 companies with healthy balance sheets have gained about 2.7 percent, compared with a loss of about 2.9 percent for companies with feeble financial ratios, according to baskets compiled by Goldman Sachs Group Inc.