High Yield Minefield

The mainstream financial media narrative? Trump or Biden would be great for the stock market.

Biden would be great for stocks because direct government stimulus should power consumers until the economy heals on its own. On the flip side, Trump would be great for stocks because business-friendly policies (e.g., tax cuts, regulation rollbacks, etc.) should benefit corporate profitability.

What few in the mainstream financial media talk about is the debt required to pay for our so called well-being. At the federal level, we’ve already jumped the proverbial shark.

US National Debt As A % Of Nominal GDP

US National Debt As A % Of Nominal GDP

Some will tell you, government debt and deficits do not matter. We print the money. We can create more of the stuff anytime we’d like.

Businesses, however, do not have the luxury of printing money. When debts as a percentage of earnings increase dramatically, it becomes more and more difficult to service the interest. High credit risk corporations (a.k.a. “high yield”) can find themselves stuck in a spiral of credit downgrades, higher interest costs and eventual insolvency.

Not surprisingly, the most heavily leveraged corporations have added trillions more to the liability side of their respective ledgers in 2020. Does that sound like a net positive?

Total Business Liabilities By Leverage Ratio Buckets

Total Business Liabilities By Leverage Ratio Buckets

Investors continue to funnel money into stocks. Yet they’re becoming noticeably shy about high yield corporate debt. In particular, the iShares High Yield Bond ETF (NYSE:) has not recovered its February highs the way that the () has.

HYG Daily Chart

HYG Daily Chart

In a similar vein, the high yield/investment grade ratio (total return) has been heading lower. Typically, stocks will follow.

Credit Woes

Then again, few things have been typical about the 2020 stock bubble. “Risk On” has been the name of the game since March.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

This site uses cookies to offer you a better browsing experience. By browsing this website, you agree to our use of cookies.