Falling Angels? (Crisis In The Bond Markets)

davfor

This is a mostly visual look at the unfolding crisis the bond markets and how we got here. Here are a few excerpts from the narrative. The visuals are worth looking at:

More than half of corporate bonds are classified by ratings agencies as risky, known as junk. An additional 30% are hovering one notch above.

...the U.S. Federal Reserve has pledged trillions of dollars to keep cash in the credit markets flowing. That support, however, is only available to companies with investment-grade debt.

About 51% of investment-grade corporate bonds globally were rated just above junk last year...a shock to the economy could set off a wave of downgrades, which would push a large and growing number of companies into junk territory.

When bonds become junk, many investment funds are contractually obligated to sell them. Forced sales can set off negative cycles. Some investors expect the Fed and the U.S. Treasury - whose job it is to work together to keep the U.S. economy on a steady footing - to reach further down the ratings ladder to help non-investment grade companies. At present, it has no plans to extend its safety net to junk.

As a result of the economic shutdown, and not factoring in any help from the Fed, the most pessimistic estimates by Moody’s project that corporate junk bond defaults will rise to more than 20% by next year.

https://graphics.reuters.com/HEALTH-CORONAVIRUS/CORPBONDS/qmyvmgylvra/index.html

catch22

`Thanks davfor, and yes ....

Charles

Yep, I fear that too.

VintageFreak

I am afraid we may be fast approaching "sell everything" mode. I'm just glad I got out of everything in my 401ks by end of Feb

WABAC

From the article in the OP:

Some investors expect the Fed and the U.S. Treasury - whose job it is to work together to keep the U.S. economy on a steady footing - to reach further down the ratings ladder to help non-investment grade companies. At present, it has no plans to extend its safety net to junk.

The anticipated lesson seems to be that no matter how drunk you get on cheap Fed rates, the Fed will give you more. And pay for a taxi to take you home.

It's easy enough to imagine what happens if the Fed doesn't lend a hand down to junk.

I'm trying to imagine what happens to asset prices in a world where central banks say they don't care how stupid you have been, here's more money. Try to be smarter next time.