Market Skeptics Sound the Alarm on Corporate Debt
As the global economy continues to ride high on optimism, a small but vocal group of Wall Street experts is urging caution. They believe that the current market prices are ignoring the very real risks of economic and political uncertainty.
A $10 Billion Bet Against the Market
Investors have placed a staggering $10 billion in bets that high-yield corporate bond exchange-traded funds will drop, the most since at least 2023. This contrarian move runs counter to the prevailing market sentiment, which is fueled by expectations of a strong American economy over the next four years.
Risk Premiums Reach Unsustainable Levels
According to JPMorgan Chase & Co. derivatives strategists, risk premiums are approaching levels that are no longer justified by the current economic and political climate. “You want to take a step back from the market as a whole and buy protection here,” warns Alberto Gallo, chief investment officer at Andromeda Capital Management in London.
Treasuries Over Corporate Debt
A handful of investors, including Gregory Peters of PGIM Fixed Income, are advocating for Treasuries over company debt. They argue that the premiums for lending to Corporate America are vanishing, making government bonds a more attractive option.
Corporate Bond Investors Complacent
Despite the warnings, corporate bond investors remain optimistic, convinced that President Donald Trump’s business-friendly agenda will continue to propel markets higher. However, this complacency may be misplaced, as spreads on corporate debt have rarely been so low.
Geopolitical Uncertainty Looms
Fresh provocations have left doubts about the global trade outlook, and the arrival of an artificial intelligence model from Chinese startup DeepSeek has already roiled markets. The risk of sharp setbacks is ever-present, making it prudent to start hedging against potential losses.
Higher Yields Lure Investors
Higher yields overall are attracting investors, even as spreads remain close to the tightest they have been this century. As a result, the asset class looks less appealing next to government bonds, which are yielding close to 5%.
Inflationary Fiscal Policies Pose Risks
For companies carrying big debt loads, the risk is that inflationary fiscal policies will curb the Federal Reserve’s ability to lower interest rates this year. This would leave firms with high refinancing costs for longer than anticipated.
Junk Bond Spreads at Pre-Financial Crisis Levels
Junk bond spreads are at pre-financial crisis levels, while those for investment-grade corporate debt are at a three-year low. Rampant demand for new issues is allowing the most indebted companies to keep refinancing, but the risks are not reflected in the current spreads.
Investors Turning to ETFs
Some investors are turning to ETFs to set up bets that pay off when spreads widen on the perceived risk of a wave of corporate bond defaults. Short interest on the $15 billion iShares iBoxx High Yield Corporate Bond ETF has swelled to about 50% of shares outstanding, the highest level since 2023.
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