Junk bonds are truly a canary in the coal mine, and when they run into trouble other financial difficulties generally follow. From SchiffGold.com via zerohedge.com:
Consumers aren’t the only ones defaulting on their debts: Corporate bond defaults were up massively in 2023, especially for high-risk junk debt, and the trend is continuing this year at a pace not seen since the 2008 global financial crisis. Unsurprisingly, companies selling low-rated junk debt are being hit the worst.
Last year, according to S&P Global Ratings, corporate bond defaults increased by a disconcerting 80%. High interest rates coupled with high inflation have made it a struggle for companies to make good on their commitments even as waves of new bond buyers continue to arrive, eager to lock in higher yields before rates go down. Demand remains strong for junk bonds and hybrid debt, but for companies with poor liquidity, poor to negative cash flow, and/or an outsized existing debt burden, the result is a compelling setup for even more defaults in 2024.
For now, with rate cuts on the horizon, interest remains strong in junk bond debt even as effective yields have fallen from their 2023 highs, and yield spreads remain relatively low:
Junk Bond Effective Yields vs Ch.11 Bankruptcy Filings, Summer 2022 to Now
Meanwhile, debts that were financed in a low-interest rate environment are due to mature in the next few years, to the tune of over $1.8 trillion by 2028 according to the Fed. When those payments come due, more companies will fall to the default wave. And if the junk bond market goes off of a cliff, it could pop the broader $13.7 trillion corporate bond bubble and take the rest of the economy with it.
