Tuesday, October 13, 2015

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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