MarketWatch's Arends: Beware the Sizzling US Corporate Debt Bomb

Tuesday, 05 Aug 2014 07:46 AM

By John Morgan

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Investors should watch out for the explosion of a corporate debt bomb because U.S. business borrowing and debt is at perilous levels, according to MarketWatch columnist Brett Arends.

America's non-financial businesses have racked up the kind of debt that would wreck most households. Corporate debt is equal to 50 percent of businesses' actual net worth — far above their historic averages, Arends noted.

"All that talk you hear about how corporate balance sheets are in great shape is a bunch of hooey," he wrote. "Corporations borrowed $993 billion just in the first quarter of this year. Corporate debts have actually doubled since 1999. "

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By Arends' estimation, investors should be wary of the bond market just as they are worried about the high-flying stock market.

Another set of telling statistics, this time from the Federal Reserve's own data: In 2007, at the peak of the last credit binge, U.S. nonfinancial corporations owed $7.2 trillion. Today, after years of easy money and artificially low interest rates, they owe $9.6 trillion.

"For the past five years, U.S. corporations have been living in a financial paradise. Interest rates have been on the floor. Wages have been flat," Arends noted.

"Companies have been able to lay off workers and slash costs. Profits have skyrocketed to record levels. And they've spent almost nothing on new capital equipment, either."

Arends conclusion is that U.S. companies have used their profits and their debt in recent years to drive up their own stock prices.

A shakeout in the junk-bond market, where corporations have piled some of their least attractive borrowings, is sparking fears those securities increasingly could be hard to unload, The Wall Street Journal reported.

Investors yanked more than $5 billion in July from U.S. junk-bond mutual and exchange-traded funds, according to Lipper, a fund tracker, raising concern that the recent selloff could intensify.

"Everyone is hoping to be first through the exit," Matt King, global head of credit strategy at Citibank in London, told The Journal. "By definition, that's not possible."

Veteran economist Ed Yardeni, chief investment strategist at the eponymous Yardeni Research, is also cautious about U.S. corporate debt, in part because Fed rate hikes eventually lie ahead.

"The US economy appears on my worry list only indirectly and only because it is performing well, showing no signs of a recession," he wrote on his blog.

"A rush out of corporate bond funds could be one of the consequences with recessionary consequences, or maybe not. It's something to watch."

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