Charlie Bilello @charliebilello posted the following chart which I replicated above, via Fred.

Let's step back and look at the long-term picture.

High Yield Spread 2004-Present

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Things are about to get worse, much worse.

The Wall Street Journal notes There Have Never Been So Many Bonds That Are Almost Junk

Percentage of Corporate Bonds One Step Above Junk

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Over 40% of the entire corporate bond market, 3.15 Trillion in BBB-rated bonds is one step above junk!

The percentage of investment grade bonds rated higher than BBB has fallen from 59% in 1996 to 42.8% in August of 2018.

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Bond Market Breakdown (August 2018)

  1. AAA $0.11 Trillion
  2. AA $0.59 Trillion
  3. A $2.60 Trillion
  4. BBB $3.15 Trillion
  5. BB $0.57 Trillion
  6. B $0.52 Trillion
  7. C $0.16 Trillion

Rise of the Zombie

In the US, 15% of the companies in the S&P 1500 are Zombie corporations. The Zombie attribute applies to firms that are unable to cover debt servicing costs from current profits over an extended period.

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Prolonged cheap debt explains the Rise of the Zombie Corporations.

Zombie corporations only survive because they can roll over debt.

Fools' Mission

The Fed is desperate to keep Zombies alive, but that keeps productivity low and it is at the expense of corporations that make better use of capital.

This bubble, widely referred to as the "everything bubble" is really an artifact of a junk bond market fueled by increasingly ignorant Fed policy since 2009.

Suddenly, No Appetite

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The above chart from Stock Markets Are Wild, but Bond Markets Can Be Dangerous.

Can corporate American handle a downturn?

Netflix has gone from having very little debt in 2010 to having more than $10 billion now. Verizon now has $113 billion of debt, more than double the amount it had six years ago. By one measure, the ratio of corporate debt to G.D.P., the total level of borrowing is at all-time highs.

And with the American economy already expected to slow in 2019, the climbing costs of corporate borrowing could determine whether any slowdown turns into something much worse.

GE

On November 12, Reuters reported General Electric seeks urgent asset sales as bond fears rise.

GE had $114 billion in debt at the end of the third quarter, 3.7 times its equity and more than four times the industry average debt-to-equity ratio of 0.77, Refinitiv data shows.

Spillover

There are many investment grade bond funds that will either have to break their agreements or dump up to $3.15 trillion of debt if there are significant debt downgrades, and there will be.

This will spill over into equities in a major way.

Don't be fooled by these stock market rallies. Bonds are due for a huge repricing event and stocks will follow in a major way.

Mike "Mish" Shedlock

Credit Spreads Widen

Variant Perception reports US Corporate Debt Near Records, Credit Spreads to Widen. Lets take a look

Junk Bond Bubble in Six Images

The junk bond to BBB-rated bond spread and the spread between AAA to BBB bonds shows amazing complacency. It won't last.

QE Singularity: No Japanese 10-Yr Bonds Trade

No Japanese 10-year bonds traded on Tuesday. The BOJ is in perfect control. This should be nirvana. Why Isn't it?

Credit Spreads Signal Recession

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

Italian Bond Market Crisis Coming Up

Italy's 10-Year bond yield surged around the Italian election. There's heavy issuance in Sept and ECB tapering in Oct.

Junk Bond ETFs Have Rough Two Weeks: Deals Pulled, Outflows Rise

Volatility has returned, at least in the junk bond market. JNK, the Barclays High Yield Bond ETF, and HYG, the iShares High Yield Bond ETF, both had the steepest decline in three months. Is this another buy the dip opportunity, or is risk avoidance about to take hold?

Number of Yield Curve Inversion Points Rises as the Long-Bond Yield Dives

The US Treasury 5-year yield is now inverted with 3, 2, and even the 1-year treasury yield.

There Are No Temporary Measures, Just Permanent Lies

The Fed announced today that it will buy junk bonds. This exceeds its legal authority. Supposedly, it's temporary.

Junk Bond Bubble in Pictures: Deflation Up Next

The widely discussed "everything bubble" is, in reality, a corporate junk bond bubble on steroids sponsored by the Fed.