First, concerns about the Great Wall of Maturity appear to have been wildly exaggerated. A year ago, the bearish scenario indicated that interest rates were rising and the economy was deteriorating just as excess high-yield debt was maturing. But since then, companies have been quietly extending their debt schedules. At the start of 2023, high-yield issuers had about $878.4 billion in dollar-denominated bond and loan issuances maturing through 2025. And since then, issuers have reduced that number by about 38%, to $542.3 billion. Most signs suggest they will continue to plod along.
Noel Hébert, Bloomberg Intelligence’s chief U.S. credit strategist – who has been dealing with this issue longer than I have – told me that concerns about “maturity walls” come up from time to time, but that since the early 2000s, he couldn’t remember when the problem actually arose. went down to the wire. As Hébert said, the high-yield market has become much larger and more diverse than many believe, so it’s hard to imagine a scenario in which companies simply couldn’t borrow new funds at n no matter what the price. “If you’re a high-yield issuer, you have corporates, loans and private companies — the market is almost $4 trillion and it’s global,” he told me Friday. “If you’re a company and you can arbitrage between three relatively active markets, you must be in a pretty tough spot to not attract any of them.”
Second, the market consensus macroeconomic outlook has improved significantly. Despite concerns that the Fed’s inflation fight could push the economy into recession, policymakers have made significant progress and the economy remains demonstrably resilient. Although an unanticipated shock is always possible (as it always is), fewer and fewer economists are forecasting a recession over the next two quarters in the Philadelphia Fed’s survey of professional forecasters. Although difficulties are expected in 2024 or 2025, it would be unusual for credit markets to anticipate a slowdown this far in advance. Among issuers in the U.S. High Yield Corporate Index, the 12-month default rate rose slightly, but then appeared to have stabilized around June and fell back to around 1.6%. It is important to note that improving perceptions of the economy can be self-fulfilling if it leads households and businesses to spend more.
Of course, credit spreads also reflect changing investor sentiment, and this is rising. The American Association of Individual Investors’ weekly survey shows investors have been bullish on the net since June – a reading that is sometimes used as an excuse to take the other side of an overly optimistic market. Bears see similar signs of complacency in the Chicago Board Options Exchange Volatility Index, or VIX, which this month hit its lowest level since the Covid-19 pandemic began in March 2020. In this version of the story, narrow spreads signal the market’s recklessness – not its collective wisdom. Without a crystal ball, it’s impossible to tell who is right.
The good news is that issuance markets remain open for business and companies continue to extend their maturity schedules in a methodical and responsible manner. So while it’s impossible to predict what the macroeconomy has in store, it’s hard to imagine the worst-case scenario being as bad as we thought at the start of the year.
Read more from Bloomberg’s opinion:
• Money Stuff by Matt Levine: People are worried about basic trading
• What the changing correlations between stocks and bonds mean for you: Aaron Brown
• What worries me? Markets yawn as inflation rises: John Authers
This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Jonathan Levin worked as a journalist for Bloomberg News in Latin America and the United States, covering finance, markets and mergers and acquisitions. Most recently, he served as head of the company’s Miami office. He holds the CFA title.
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