A New Recession Canary in the Coal Mine, Morgan Stanley Says
Morgan Stanley strategist Srikanth Sankaran in a new note.
He points out that while junk-rated bonds have traditionally been the credit market’s first to crack as economic conditions deteriorate, that position may now be filled by the more than $1 trillion worth of floating-rate loans.
These leveraged loans were supposed to be big winners for investors as interest rates rise, since they reset to keep up with benchmark rates set by the Federal Reserve and therefore offer the possibility of higher returns.
Some analysts have warned that companies which have borrowed using leveraged loans will face higher bills that could threaten their ability to repay.
Bloomberg 30 August 2022
Fotnot
Canary in the coal mine
An allusion to caged canaries (birds) that miners would carry down into the mine tunnels with them. If dangerous gases such as carbon monoxide collected in the mine, the gases would kill the canary before killing the miners, thus providing a warning to exit the tunnels immediately.
Corporate junk bonds in the US...
...are paying investors a paltry premium for the risk of holding them into a looming recession. Either spreads need to widen or the recession clouds need to vanish, but something’s got to give.
Part of it probably boils down to some version of the “there is no alternative” sentiment — TINA, as it’s known — that used to pervade equity markets. The downside risks are plentiful for the stock market, and commodities markets may have topped out after the early 2022 rally, so perhaps corporate bond risk doesn’t look so bad by comparison.
Jonathan Levin Bloomberg 30 augusti 2022
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