While high-yields bonds (HYG) have held up better than equities, there are signs of cracks forming.
Negative developments at GE have caused some to speculate more highly leveraged borrowers are looking at downgrades. The lower tiers of investment grade ratings currently represent a large number of bonds and if we see a series of downgrades pressure could mount on the corporate bond market, both investment grade and high-yield.
I am still viewing this entire episode as a cycle slowdown and not the end of the cycle. The Fed will likely put the break on interest rate hikes in 2019 if credit markets continue to rumble. The real estate market has already broadcast a slowdown and change in buyer behavior attributed to higher interest rates. Weakness in the corporate bond market has their attention. One aspect that may be overlook in the corporate market, however, is the impact of corporate tax reform on the ability of borrowers to service debt more effectively.
The U.S. economy is still doing well and there may be more to come if congress can get together on an infrastructure project. Trade talk with China remains a risk but so far the impact to the U.S. has been limited.
I have set another alert for the high-yield market. Should it trigger I will become more concerned about junk bonds rolling over which would likely represent a negative development for stocks.
