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TEHRAN, December 31 -The stock market’s gyrations have grabbed the year-end headlines, but another key financial market, investment-grade U.S. corporate debt, is turning in its worst yearly performance since the financial crisis a decade ago.
TEHRAN, Young Journalists Club (YJC) -The stock market’s gyrations have grabbed the year-end headlines, but another key financial market, investment-grade U.S. corporate debt, is turning in its worst yearly performance since the financial crisis a decade ago.
General Electric Co’s (GE.N) securities have weighed on both markets as the 126-year-old conglomerate founded by Thomas Edison has suffered staggering losses and asset writedowns.
GE shares have skidded around 56 percent in 2018, the fourth-biggest decline in the S&P 500 Index .SPX. GE's $120 billion of bonds are not down as much, but the securities, which have long been a staple for fixed income managers around the globe, are among the leading drags on the main indexes tracking the $6 trillion investment-grade corporate debt sector.
GE’s bonds have crashed by around 14 percent - a monumental underperformance in bond market terms. Analysts worry this could signal worse times ahead for investment grade credit overall. According to the Bank of America/Merrill Lynch index, the sector’s total 2018 return is negative 2.5 percent, the largest drop since 2008.
U.S. companies feasted on low interest rates in the decade since the crisis, leaving corporate balance sheets leveraged to the hilt with some $9.1 trillion of debt, almost double the 2007 total of $4.9 trillion, according to Securities Industry and Financial Markets Association.
Now the Federal Reserve’s gradual tightening of its easy-money policy has investors rethinking their commitment to these assets. Bonds from dozens of formerly high-quality issuers are already trading as though they were no longer investment grade.
As interest rates rise, “the weaker links are going to be exposed,” said Kathleen Gaffney, director of diversified fixed income at Eaton Vance.
After this year’s sharp slide in GE shares, its debt load now stands at roughly twice its market capitalization of $63 billion.
Source: Reuters
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