by Mish

The present calm in high-yield markets is entirely unwarranted and at odds with where we are in the US credit cycle. Corporate debt to GDP in the US is at all-time highs. In the past, whenever corporate debt reached around 42-45% of GDP, the US approached a recession. Today rates are lower, but corporate debt is already above 45% of GDP. Some investors prefer to look at net debt minus liquid assets, but even there, the measure is higher than in 2001 and 2008 (also the top 50 companies hold two thirds of all cash, so aggregate figures are highly misleading).

Every single leading indicator we have points to wider credit spreads. It doesn’t matter if you look at accounting relationships (cash flow to debt, capex to EBIT) or economic relationships (corporate debt-to-GDP, lending growth YoY), or market relationships (yield curves flattening). The message is wider spreads are inevitable.

Credit Spreads Expected to Widen


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Mike “Mish” Shedlock

Credit Spreads Signal Recession

$176bn worth of corporate bonds has fallen from 'A' to 'BBB' so far this quarter - the highest since late 2015.

Suddenly There's No Appetite for Bond Deals as Spreads Widen

High yield credit spreads to 10-Year Treasury yields continue to rise.

European Sovereign Debt Crisis in Pictures; PIIGS Spreads to Germany at or Near Record Levels

The sovereign debt crisis in Europe is still simmering. Country by country, spreads to German debt are at or near record levels.

Coronavirus Can Spread in Poop and On Doorknobs

Let's take a look at some of the latest reports on the spread of the coronavirus.

Asymmetrical Unwind of the Credit Bubble

In How Does One Invest For “Muddle Through”? I talked about unwinding of the credit bubble. Here is the pertinent section:

Serious Credit Card Delinquencies Rise for the Third Straight Quarter: Trend Not Seen Since 2009

Every quarter, the New York Fed publishes a report on Household Debt and Credit.

Families Go Deep in Debt to Stay Middle Class: Revolving Credit Jumps 11.2%

The Fed's consumer credit report shows a jump in total credit and an even bigger jump in credit card debt.

ISM-Markit Manufacturing Divergence Widens Again

The divergence between the ISM Report on Business and the Markit PMI manufacturing index widened this month. ISM increased slightly from 54.8 to 54.9 while the Markit reading declined slightly to an 8-month low of 52.7 from 52.8

ISM vs Markit PMI Divergence Widens Again: Believe Markit

The manufacturing soft-data reports have been nearly unanimous in reporting widespread strength that has not shown up in any hard data reports.