Party is over… Contagion is spreading to corporates!

Party is over… Contagion is spreading to corporates!!
byu/Terrible_Ear_9678 inbonds

“The sharp sell-off in US government bonds is starting to spread to US corporates. This raises the spectre of defaults among the most low rated businesses (CCC and below).

While investment grade is still insulated, borrowing costs for the lowest rated junk companies (CCC or below) have reached 17%, their highest levels since 2020. This is driven by the rise in Treasury yields – no free lunch as investors are demanding higher compensation for their capital. Of the 4.3% rise, only 1% is from higher treasury yields – the rest is the risk premium, which has risen to 12%.

At these levels the math doesnt work for many of these businesses. A company carrying 6x Debt/EBITDA would spend nearly all of its earnings on interest. Those with floating rate debt are particularly exposed, as they cannot hide behind locked-in low coupons.

Although investment grade remains resilient, contagion from government bonds is starting to spread to the weakest parts of the corporate sector. It would be interesting to see how this plays out across the other rungs of the bond sector.

Clearly there is a lot more demand for capital than supply can accommodate across capital hungry AI companies, fiscally poor governments and corporates desperate to continue growing. The US government borrowed $2.5tn new money over the last 12 months, and with foreign buyers stepping back, investors are demanding higher yields.

Foreign capital is also stretched. In 2010, Japan alone could cover America’s net foreign debt. Today it takes the top 10 creditor nations combined. And Japan’s 30-year bond yield is at a record 4.23%, giving Japanese savers a reason to keep their money at home.

The weakest borrowers are the last in line. Let’s watch how this plays out!”

US real estate stocks are now at their lowest level ever relative to the S&P 500, erasing all of their relative outperformance from the early-to-mid 2000s housing bubble
byu/RobertBartus inEconomyCharts