John Rubino: Yet Another Debt Default Chart Is Screaming ‘Look Out!’
SilverDoctors.com
March 21, 2018
“the business cycle is embedded in human nature rather than some kind of external constraint that we can evade with clever tricks…”
by John Rubino of Dollar Collapse
So many patterns that have held for decades seem to have broken down, leading to one of two conclusions: Either this time really is different in ways that appear to violate what used to be seen as iron-clad laws of finance, or those laws have been bent but will reassert themselves with a vengeance sometime in the future.
The latest example is the relationship between corporate debt and default rates on that debt. Historically they’ve moved in the same direction, with higher debt levels leading to higher default rates. That makes intuitive sense because rising debt implies that borrowing is easier for less creditworthy companies who should be expected to default at a higher rate.
But not this time:
Here’s why default rates are subdued even as corporate debt levels hit records
(MarketWatch) – U.S. corporate debt levels stand above crisis highs even as default rates among the most leveraged firms remain subdued.
With an economy hitting its stride, it’s perhaps no surprise that the high-yield bond market is placid. The extent of the divergence between debt levels and defaults, however, is worrying to some analysts who feel rising corporate indebtedness will eventually catch out unwary investors and deflate the junk-bond market.
But beyond complacency John Lonski, chief economist at Moody’s Capital Market Research, argued that globalization and the tendency of U.S. businesses to hoard cash as reasons why corporate debt levels may no longer move in sync with default rates and credit spreads.
The high-yield default rate in the fourth-quarter of 2017 fell to 3.3%, even as U.S. nonfinancial-corporate debt ended in 2017 at 45.4% of GDP. This compares with a much higher default rate of 11.1% in the second quarter of 2009, with corporate debt levels at 45% of GDP. Granted, the current levels come with the economy in the eighth year of an expansion, while the second quarter of 2009 marked the final quarter of the longest and deepest U.S. recession since the Great Depression.
The yield spread between high-yield bonds and safe government paper, as represented by the 10-year Treasury note narrowed to an average 3.63 percentage points in the fourth quarter of 2017, from an average 12.02 percentage points in the second quarter of 2009. The tight credit spreads reflects that borrowing costs are still close to historic lows, and that investors are demanding minimum compensation for holding arguably the riskiest debt in the bond market.
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