U.S. Bond Market Week In Review: Why The Fed Is About To Make A Mistake In Raising Rates

Bond Yields

Over the last several weeks, I’ve noted that CCC and BBB bond yields have widened.In the case of CCC, the sell-off has been significant.  As I previously noted:

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There are several reasons for these developments.  First, thanks to low oil prices, there’s been an increase in oil company defaults:

A slide in oil and commodity prices has weighed on smaller energy producers, primarily in the US, as big Opec producers continue pumping crude to maintain market share. In the US, about three-fifths of defaults in 2015 have been among energy and natural resources businesses, including Midstates Petroleum, SandRidge Energy and Patriot Coal.

But this isn’t the only sector hurting; weakness is rising overall:

After six years of easy-money central-bank policies kept over-leveraged companies afloat and left scant opportunities for traders who profit off the market’s scrap heaps, a rout in commodities prices in 2014 presented what had seemed like a perfect chance to buy again. Instead, those prices only declined further this year, causing the debt of everyone from oil drillers to coal miners to fall deeper into distress. As the losses intensified, gun-shy investors pulled back from almost anything that smacked of risk, spreading the losses to industries from retail to technology.

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Perhaps the biggest potential problem is companies have allocated most of their newly acquired indebtedness to share buybacks:

Lower-rated credits are the bond market’s canary in the coalmine; they are the first group to sell-off at the end of an expansion. This is why the BAA yield is a long leading indicator.

Corporate Profits

From Bloomberg

Profits from S&P 500 companies have fallen by about $25 billion in the first three quarters of this year, and a further drop is expected before the end of 2015 as energy companies battle with lower oil prices and a sharp rally in the dollar hits exporters.

However, corporate profits have been growing slowly for a few years:

Also consider this chart from Ryan Detrick:

There are a number of reasons cited for this drop: weaker overseas markets, the strong dollar and weakness in the oil sector. Regardless of the reason, it appears corporations have having a difficult time increasing gross revenue. Corporate profits are also a long-leading indicator.

The nature of inflation’s weakness. 

I wrote about this several weeks ago and am reprinting that article:

Several Fed President’s gave speeches this week. But the speeches offered by St. Louis President Bullard and Chicago Fed President Evans highlight the different perspectives held by the members of the open market committee. St. Louis President Bullard framed his discussion of the economy through the prism of “five questions,” for which he provided the italicized

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Disclosure: None

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad ...

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