US BONDS ARE SIGNALLING A COLLAPSE OF COPRORATE
US bond markets are under
pressure and the symptoms form the same are not very attractive and rather they
are creating pressure on the global economic crisis which might come ahead. I
am not promoting any negativisms but don’t forget that if we have taken the
reports of IMF and other economist about the U.S housing market collapse of
2006 then we should have avoided the recession. The global economic slowdown
and slow down of China is creating a major impact on the cash flows of the US
companies. Credit-rating firms are downgrading more
U.S. companies than at any other time since the financial crisis, and measures
of debt relative to cash flow are rising. Investors have become cautious
and many companies may not be able to pay back as profits are coming down. On the other hand investors are now demanding
more yield to have corporate bonds relative to benchmark U.S. Treasury
securities.
One will be shocked to find out
that in August and September, Moody’s Investors Service issued 108
credit-rating downgrades for U.S. non-financial companies, compared with just 40
upgrades. Standard & Poor’s Ratings Services downgraded U.S. companies 297
times in the first nine months of the year, the most downgrades since 2009,
compared with just 172 upgrades. One of the key triggers for the growth of US
bond crisis is that they have borrowed heavily to attract buy back of shares
resulting massive slippages. The mismatch of bond prices in US between rated
and low rated have become narrow which reflects that there is a presence of
strong problem in the system. Big U.S. companies with global footprints,
like Caterpillar Inc.,Monsanto Co. and Hewlett-Packard Co.,
have all announced layoffs in recent weeks. Analysts and investors say a strong
U.S. dollar compared with currencies in other countries will hurt some U.S.
companies’ revenues in the coming months.
US corporate particularly the oil
industry is just simply using its reserves of cash flow to pay back debts. This
means that over the long term their will cut down in expansion plans since cash
reserves are getting depleted. Many other industries who have taken massive
debts and raised corporate bond are now using their cash reserves to pay back
debt since they are facing the problem of corporate debt being cut down. The
percentage of cash flow dedicated to making debt payments ballooned to 83
percent in the second quarter, up from less than 45 percent in the first
quarter of 2012. Long term investment will get slower and also capex expenditures
are going to be cut down. A slow down and skeptical approach envisaged in the
long term in the US economy will create pressure on the export markets of the
developing economies. I would rather say that this slow down will be more
powerful than the recession. Capitals will go for a toss in the near term.
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