Corporations Leverage Fed’s Rate Pause to Lock-in Lower Rates on Junk Debt
“Too Big to Fail” corporations searching for an opportunity to refinance high-risk debt have been given a gift. But this gift comes with risks.
Fed Chairman Powell decided back in January to pause any rate hikes after evaluating multiple risk factors, according to USA Today:
Over at ZeroHedge this debt refinancing situation is outlined (emphasis ours):
And Bloomberg revealed the chart that shows this junk-bond trend clearly…
And if high-risk debt alone doesn’t pose major risks, by putting pressure on the Fed to lower rates, POTUS “has effectively given corporations a green light to continue on their debt binge by effectively putting off their day of reckoning,” according to the same ZeroHedge piece. Delaying the inevitable is never good.
Everything is “Fine” Until the Corporate Debt Party Ends
Both of those, along with the Great Recession of 2008, appear to coincide with three major dips in Barclays High Yield Bond ETF (see arrows in chart below):
Of course this could be a three-time coincidence, but these dips also coincide with times that high-risk debt was being sold on the market.
Strangely enough, another dip in the JNK fund is happening right now, coinciding with the recent Fed rate pause and record junk bond issuance.
That’s a lot of coincidences to simply write off. In any case, this corporate debt will have to be repaid at some point.
There’s no telling if the corporate debt party will be ending soon. But if a good portion of the market growth since the recession has been propped up by this high-risk debt, that’s like propping up a 50lb weight with a foundation of playing cards.
And it’s all bound to come crashing down sooner or later.
It’s No Different “This Time” Than It Is Any Other Time
Granted, this recent round of junk bond issuance to lock in low rates appears to be appropriated for refinancing rather than stock buybacks. We just have to hope there isn’t some coincidental corporate “sleight of hand” being used to prop up profit and loss statements like we’ve seen before.
Some market optimists like Goldman Sachs claim it’s “different this time,” citing better business fundamentals. But Tesla, Netflix, and other over-capitalized corporations that are burning cash by the truckload seem to show that it won’t be much different.
So don’t fall for their optimism. Start protecting your savings before this house of cards collapse with assets like precious metals that are known to do well in uncertain markets. When corporations start filing bankruptcy or asking for taxpayer-funded bailouts, it will already be too late.
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