July 17, 2016
Non-investment grade (“junk”) bonds are our canary in the economic coal mine.
They took a beating last year, but prices have stabilized with investors of all stripes chasing return, and where else but in “junk” can you earn a few percentage points of interest.
Today, when stellar credit government bonds and even a few top-notch corporates are being issued close to zero percent (some even negative) interest territory – that is, you are paying them to lend them money, trade credit exposures do not seem a problem. Watch out when rates start to tick up, because they will, maybe not in the near term, but the artificially low interest rates can not continue forever. Right now, low mortgage rates combined with reasonable gas prices are providing the average consumer with spending money, and are keeping this economy afloat.
Watch the actions of the Federal Reserve. When they figure that the economy is heating up and increase interest rates, bonds will take a beating, commercial real estate will take a beating as commercial mortgages are often for 5-7 years, non-investment grade will become real junk, and economic troubles will lie ahead, so be prepared to adjust your credit exposures.