Debt Crisis Looming? Yes, Corporate Debt Expanded but Don’t Panic Over the Prospect of Bbb Downgrades

In our sixth article from the (JACF Spring/Summer issue)Martin Fridson’s piece examines how the popular press often tends towards sensationalism and, unfortunately, the supposedly more sober financial press is not always better. It is true that many American companies have taken the opportunity to borrow large sums during recent years when interest rates were close to their all-time lows. This has also led some media commenters to predict a large number of marginally investment grade debt issues (e.g. BBB rated on the S&P rating scale) will be downgraded to less-than-investment-grade status–or to “junk”–as such bonds are commonly known.

Veteran fixed income analyst Martin Fridson takes stock of the situation in mid-2018. While emphasizing that a bear market is inevitable someday, he advises investors not to panic now. Despite the more apocalyptic scenarios offered by financial commentators making dubious connections between today’s corporate bond market and possible future high-yield events, the aggregate numbers do not add up to an end-of-civilization-as-we-know-it story. Some of the numbers mentioned in financial commentary are at least slightly misleading.

The present market lacks the sort of structural weaknesses likely to trigger a major bear cycle in fixed income securities, such as overleveraged buyouts and early-stage telecoms. While there are some questionable issuers in the market, these are isolated cases, rather than representatives of a vast segment of today’s high-yield universe.

Authored by Martin Fridson, Lehmann Livian Fridson Advisors.

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