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BOND MARKET WARNING: 'People are going to be carried out on stretchers

Published by Business Insider on Mon, 07 Dec 2015

Parts of the US corporate bond market are starting to look increasingly risky, and "people are going to be carried out on stretchers."That was thefantastic quote in the Financial Times on Sunday from Laird Landmann at TCW, a major asset management firm. According to the report, Landmann added: "when earnings are coming down, leverage is high and interest rates are going up. Its not good."Landmann isn't the only one voicing concerns about the market ahead of the Federal Reserve's December meeting on December 16.The Fed seems likely to finally hike interest rates after 7 years at practically zero. Though the climb in rates will likely be slow, and the US central bank has given more warning than ever before, there are concerns about how well the market can handle even a small amount of tightening.Rising interest rates are bad news for any firms that are already struggling to service their debts. Bonds for already-risky companies offer the highest yields, but they're also the ones most likely to go under if the hikes are too much, too soon. The FT refers to a UBS report referring to over $1 trillion (663.2 billion) in high-yield bonds that are in the "danger zone."Over the weekend the Bank for International Settlements (BIS) referred to what's going on at the moment as an "uneasy calm" (presumably before Janet Yellen unleashes the storm).BIS is often referred to as the central bank of central banks, and it'shome to some of the most prominent sceptics of the attempts to loosen monetary policy and spark demand around the world since the 2008 financial crisis.This time, the BIS quarterly review voiced concerns over how emerging markets would handle a hike. It compares the outlook to the "taper tantrum" in 2013, when Fed chair Ben Bernanke announced the intention to taper quantitative easing. Then, the US economy wasn't as strong, but global equities were rising and exchange rates had been stable for the previous six months. This time round, exchange rates have been weakening against the dollar and stocks have been weak too.Here's a snippet:Weaker financial market conditions combined with an increased sensitivity to US rates may heighten the risk of negative spillovers to EMEs when US policy is normalised. On the one hand, a solid US recovery, the basis for an interest rate hike, is likely to benefit EMEs through trade channels. On the other hand, further dollar appreciation and increasing yields may pose additional risks to growth and inflation in some countries.The problem for emerging markets isn't just higher interest rates, it's that stronger dollarany company in the rest of the world that has taken out dollar-denominated debts and seen its own currency slide against the greenback is seeing its repayments get more and more strenuous.Join the conversation about this storyNOW WATCH: JAMES ALTUCHER: The American Dream is a lie
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