Of all the fears sweeping the markets right now, perhaps the most worrying is the fear of a debt crisis in the corporate sector.
Warnings about corporate debt rising to unsustainable levels are intensifying, at a time when interest rates are at record lows and even Greece joined the club of negative-yield sovereign debt issuers.
It must be a strange experience, being a central banker these days. Ever since the financial crisis of more than a decade ago, central banks have had to reconcile two opposing goals — both of them self-imposed.
Central banks are trying to prolong the decade-old bull market, but it looks like instead of reassuring investors, this makes them nervous.
January was an extraordinarily positive month in the markets for virtually all assets, after a horrible 2018 — and it’s all due to the Fed. The US central bank executed a massive U-turn in its monetary policy and, while many observers like to point to low inflation as the reason for the Fed’s aborted effort to normalise monetary policy, something more sinister is behind it.
Corporate bondholders, beware. The wave of enthusiasm for this asset class, which has helped it to reach new heights, is now ebbing. A research paper recently published by the IMF illustrates the reasons behind this – although it must be said the paper does not represent the official position of the IMF.
Politics are back in play in most of Europe, and this doesn’t bode well for central bankers. Even the almighty European Central Bank had a moment of weakness last week, when it broadcast a message so complicated to markets that it should not be surprised it fell wide of the mark.
A change of direction so subtle that it is going unnoticed for now has begun in the economy – and investors will soon have to acknowledge it and learn to take advantage of it.
If you’re still struggling to put together a Halloween costume, RBS strategist Alberto Gallo suggests trying to dress like a zombie bank.
The reports – or rumours, as some have called them – that the European Central Bank may decide to buy eurozone corporate debt couldn’t have come at a better time for high-yield bonds.
A report by Austria’s Erste Bank shows that over the past two weeks, the restlessness in equities has also been felt by corporate bonds, and particularly high-yield bonds.