US junk bond issue hits record as GDP slows

Junk bonds.pngAs noted by a blog reader last week, retail investors are throwing caution to the winds.

Unwilling, or unable, to adjust their lifestyles to cope with lower interest rates on government bonds, they have rushed to instead buy higher-yielding ‘junk bonds’.

These are less than normal ‘investment’ grade, and offer increased yield in exchange for higher risk of default.

Clearly, however, investors are focused on the yield, not the risk. The Wall Street Journal notes:

• Junk bond sales to date are up 80% versus 2009, at $155bn
• This week saw $15.4bn sold, an all-time record

Meanwhile, overall US economic conditions continue to disappoint. The latest trade figures prompted many economists to reduce Q2 GDP estimates still further. First estimated at only 2.4%, very low for the middle of a supposed recovery period, some are now suggesting it could have fallen below 2%.

GDP in export-led countries such as China and Germany has soared in H1. But this growth will be cut short in H2, if the US economy is indeed sliding back towards recession. After 2009’s downturn, the US’s share of global GDP has risen to 25%, according to latest World Bank figures.

Junk bond investors may be partying for the moment. But when even the Chairman of the US Federal Reserve describes the outlook as being “unusually uncertain“, the blog maintains its preference for strategies that prioritise return of capital versus return on capital.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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