August 6, 2013
Thanks to an over-flowing cup of Fed liquidity, corporate debt maturities have not only been pushed out in time but have risen in their nominal outstandings as cheap financing was too good to ignore (especially for those firms on the bubble of failure). The problem these firms face now is, with the Fed set to Taper (and indeed tighten on rates in the next few years); the outlook of much higher bond yields will have a major impact on firms that levered up and used this period to ‘survive’.
As is clear from the chart above, debt maturities will once again surge in 2-3 years; and given credit markets now focused on fundamentals (future cashflows) as opposed to merely technicals (fed liquidity flows), the wall of maturities just as rates are rising (and liquidity being withdrawn) will make high-yield investors increasingly nervous (and feedback into lower valuations for stocks, no matter how exuberant a rotation retail investors expect). The message once again appears to be - there’s no free lunch as the Fed has merely dragged forward exuberance at the expense of dystopia in the not so distant future.
The bottom-line is that the credit-cycle cannot be hidden forever – unless we can rest assured that even if the Fed does ‘Taper’ it will rapidly ‘un-Taper’ soon after as the gross misallocations of capital(rise in liabilities – which will not drop – against an artificial rise in assets – which will fall)…
Chart: Morgan Stanley
This article was posted: Tuesday, August 6, 2013 at 5:12 am