Gundlach’s Warning to Corporate Bond Investors
The comments below are an edited and abridged synopsis of an article by Robert Huebscher
The problem facing the corporate bond market is excessive debt and an oversupply of bonds. A massive increase in the size of the investment-grade market and deterioration in the quality of debt indicates that the corporate debt-to-GDP ratio (leverage) has increased significantly. The corporate debt-to-GDP ratio and the spread between high-yield (junk) and Treasury bonds moved in sync from1994 until 2013, after which leveraging increased without a similar increase in spreads. As a result, both corporate and high-yield bonds are at or close to their most extreme levels of overvaluation historically.
With respect to investing, the bond credit rating represents the
The G4 central banks’ (Bank of England, Bank of Japan, Federal Reserve, and European Central Bank) balance sheets are now shrinking, largely due to the Fed’s $50 billion per month quantitative tightening (QT). As the Fedstarted QT, the 10-year Treasury yield rose almost in sync with the Fed’s shrinking balance sheet. As a result, it’s possible that yields could go up in a recession. Moreover, the US is faced with $21 trillion in debt. With that piling up in the government’s coffers, the Treasury Department will need to get creative in figuring out how to finance it. It will have to increase the sizeof its bond auctions in coming years. Unfortunately, Treasury bonds are unattractive to foreign borrowers because of US trade policies, and because hedging costs are too high. Moreover, Treasury bonds are unattractive to domestic buyers unless inflation goes down. How will the deficit crisis be resolved? When the nation realizes that the path they are on leads to catastrophe.