Displaying items by tag: debt

(New York)

Big debt investors are pouring dollars into risky debt markets and products, such as CLOs and their subprime-backed assets. Why you may ask? (as anyone might right now) The answer is that the riskiest borrowers are surviving this downturn much better than anyone expected. Spreads between subprime-backed products and US Treasuries have narrowed sharply, while new deals have seen big demand. According to an analyst at Loomis Sayles “What is surprising is how strong credit performance has been … Fiscal policy is really keeping the subprime borrower afloat”.

FINSUM: Regardless of whether or not you are involved in this market, it is good news that the demand for these securities is actually being driven by fundamentals. It is both a sign of economic resilience, and also of market rationality.

(New York)

For many years after the Crisis, the main theme around consumer debt was the idea that Americans were deleveraging. However, steadily, consumer debt has risen back to alarming levels. In the first quarter of this year, consumer debt hit $14 tn, surpassing the $13 tn of leverage pre-Crisis. Student debt has been a major area of credit expansion. Even when comparing debt to the population, the debt per person is a little higher than in 2008.

FINSUM: So obviously inflation needs to be accounted for here, but the picture is still worrying. It is yet another sign that we may be nearing the end of this run.

(Chicago)

There is an enormous asset bubble that has engulfed much of the US, yet you probably haven’t even heard of it. That bubble is threatening a meltdown that has not occurred since the 1980s. Where is the bubble? In debt linked to farm land values. Despite falling grain prices for years, Midwest farm land has held its value very well. This has led to debt levels that hve not been seen since the farm debt crisis of the 1980s. Farm income has fallen by half since its peak in 2013, yet farm equity has only dropped 5%. According to the FT, “Farmers remain creditworthy in the eyes of banks, even as their incomes fall, because the collateral value of land remains high”.

FINSUM: That last sentence is very dangerous because it sets the stage for a doom loop of dropping values and high rates, and foreclosures, leading to even worse values. Many big lenders have a lot of money tied up here, and there are likely implications for muni bonds as well.

(Washington)

Don’t look know, but market could be facing a big risk in September. Investors will remember that Congress voted to suspend the debt limit until March 1st. That date has come and passed and now the Treasury is using extraordinary measures to meet the US’ payment obligations. However, it says it will exhaust those options by September, meaning the US could end up in a major cash crunch.

FINSUM: Get ready for another early autumn political crisis over the budget, deficit, and debt ceiling.

(New York)

Small caps are having a great year so far, but there are increasing worries that the good times might not last. The Russell 2000 is outperforming the S&P 500 by 3% (13% vs 10%) this year, but has tumbled in recent days, a troubling sign. What could be driving the losses is that the big gains in price have not corresponding to improving fundamentals. For instance, small cap performance is very tied to purchasing managers index data (PMI), but the rise in price has not been tied to changes in the PMI. Additionally, small cap companies tend to have the most floating rate debt, which puts them at a higher risk of rising rates. They also tend to have much lower credit quality, meaning they are the most susceptible to shifting rates. More than half the debt issued by small companies is rated as junk.

FINSUM: There is no reason to think the bottom is going to fall out here. However, a sense check seems necessary for small cap investors as there are significant risks.