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Corporate Bond Market Glut

October 14, 2019
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The month of September set the new all-time record in world-wide corporate bond issuance – topping $300 billion for the first time. Issuance for the entire year is on pace for a new all-time record of about $2 trillion. Even iPhone maker Apple went back to the market, taking advantage of very low interest rates, and issuing debt even though they have a balance sheet loaded with cash. In the first week of September, Apple, John Deere and Walt Disney Co all sold 30-year bonds AT A YIELD LESS THAN 3% FOR THE FIRST TIME IN HISTORY.

 

European companies have already set a one-year record of bond issuance ($437 billion) being on pace for an annual number $631 billion. So, with interest rates so low (about $15 trillion in debt is still at negative interest rate yields) companies are taking advantage and leveraging up their balance sheets or refinancing their debt at lower interest rates.

On the other side of the debt issuance, investors are sucking up these bonds hungry for some yield because of lackluster economic growth. $17 billion flowed into U.S. corporate bond funds alone in September, extending a 38-week streak of inflows according to data from EPFR Global.

There are still big concerns about trade tensions between the U.S. and pretty much the rest of the world.

With all this additional debt, risks are starting to catch up with more borrowers. Corporate defaults in 2019 worldwide already match those in 2018, with 82 globally this year, S&P Global Ratings said on September 26. The huge bond issuance of the last month is also mostly in the investment grade space. Some junk bonds have failed to issue recently so all is not perfectly rosy in the bond world. Of course, when you throw in fears of trade wars, real wars, impeachment, etc. – the entire investment environment isn’t perfectly rosy.

However, the stock market remains parked just off its all-time high. The last couple weeks have seen some significant volatility. Most notably is how powerfully some momentum stocks have sold off relative to value stocks. Very interesting as well is the AAII Investor sentiment survey that just set a 2019 NEW LOW in investor bullishness last week at 21.37%. This is in comparison to a 38.09% long term average bullishness and 75% bullishness in the 2000 technology bubble.

On top of that, the third quarter (and actually all of 2019 for that matter) has turned into a “dash for cash preparing for the crash.” In other words, there have been big flows of money out of stock funds and into money market “cash” funds. How are the major stock indexes just off their all-time highs with all this going on?

From this perspective our investing environment doesn’t feel like an “everything bubble” in asset prices that is getting ready to pop. In 2000 and 2007 every day investors wanted to buy IN to tech and real estate – they weren’t preparing for a crash.

Regards, and good investing!

Greyson Geiler