Corporate Debt Gone Wild

Public and private debt levels are at all-time highs, and with stocks seeing their worst week since 2008, many are wondering what excess debt means for the future. To understand how private debt is likely to handle a downturn or recession, Financial Sense Newshour turned to Financial Sense Wealth Management’s CIO Chris Puplava, who relies on fundamental analysis and unbiased research to inform his analysis. For audio, see We're Due for a Correction, Says Ralph Acampora.

Corporate Debt's Red Flags

Corporate debt levels are raising a red flag right now. The U.S. corporate investment-grade bond market has deteriorated significantly in terms of bond quality over the last few years. In the early 1990s, the average corporate bond rating was not BBB, (the lowest investment grade rating). A-quality bonds were closer to the average, with the highest rating at AAA. Over the past three decades, average bond quality in the investment-grade corporate bond market deteriorated to the point where half of the entire U.S. corporate debt market is rated BBB— only one notch above junk status.

Puplava said another economic recession is inevitable, thanks to a business cycle that has yet to have been repealed. When this recession does happen, the poor quality of corporate debt could create several problems for investors. In such a downturn, Puplava explained, corporate revenue will decline thus reducing their ability to service debt. Before that happens, we are likely to see interest rates for corporate debt begin to move up relative to Treasuries, which means the cost of financing debt is more expensive.

“There is a tremendous amount of corporate debt that is maturing in the next two to three years,” Puplava said. “If this debt matures at a point where it has to be refinanced with new debt at higher interest rates or at a time that we're in the midst of a recession, there are going to be some problems. Investors need to pay attention and understand what they own to know when to sidestep the investment-grade market and either go to cash or Treasuries.”

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