Stock Markets Are Wild, but Bond Markets Can Be Dangerous

I am astonished that, out of 28 comments (only 28 as I write this!), nearly half are complementing the NYT on giving them the "information they need to understand the bond market and its effect on corporate decision making". Is this cohort the only readers of the NYT that haven't been to college? This information I learned 50 years ago when in high-school and in Econ. 101 at college. A 'bond trader' even wrote that this is an acceptable explanation of the bond market. This kind of explanation is never the full story in 2018. It might have meant something in 1958, but not now. Every one of - I use the term 'the financial elites' (such as hedge funds and Wall street financial defrauders despicable people) - knew that raiding (small 'a' now) america's corporations, buying and merging companies using ultra-low cost loans kept artificially low by the 'government', would create huge debt structures. And that this debt would (not might) crash when (not if) interests rates rose high enough. And sure enough, now corporations will soon be unable to even 'service the debt' on those loans, requiring them to borrow more money at higher rates to just make the interest payments on those loans. So we small-time investors get the shaft buying with corporate bonds, only to lose again after bailing out the wall streeters with Trillions of dollars in 2008, while the current 'government' gives the elites another $1.5 Trillion free dollars again this year.

The Emergency lights began flashing with “Rocket Boy” and the rising Right. The market doesn’t like a power vacuum.

See my previous post. For reference, see NYT Aug 9, 2018 article by William D Cohan. Ph, Sfo

Bond markets don't dictate the cost of borrowing money. Interest rates do. Interest rates drive bond prices.

This does not seem to be a cause for alarm, but rather an acknowledgement that the market is functioning correctly. Please recall Modigliani and Miller. The return on investment in a company is independent of the method of financing. All that is happening is that there is a shift from paying stockholders to paying bondholders. For every investment, the return can be divided into tranches, the first few tranches are low risk while the last tranches are high risk. Over the last decade almost all of the return, low risk and high risk, has gone to stockholders. All that is happening is that we are returning to a more balanced risk/return environment between stocks and bonds.

Thanks to the writers for this clear, cogent, and insightful piece! All these variables, "wild" and otherwise, cry out for careful management by those managing the economy and consistency in our government policies. Sadly, neither is evident, nor do they seem to be likely, giving the inhabitant of the White House and his erratic demands and actions. How does THAT effect things? (That's a real question!) How can people and institutions factor that into their planning?

Much of this information appeared on a daily basis in the Market Summary page. It was eliminated about a month ago when you gutted the business section. The Market Summary page is now titled (accurately) What Happened in the Stock Markets Yesterday. I for one used to look at the bond information. How about returning to the old format?

I agree with others that this article is alone worth the price of my subscription; thanks for the tutorial. One important item this article only touches upon is the huge amount of corporate debt that has been taken on by smaller banks and (more importantly) VC firms. Those entities don’t have the same reporting requirements as large banks, so no one really knows how much debt exposure they have. Replace subprime mortgages and credit-default swaps in 2008 with corporate debt held by banks large and small, and VC entities, and it’s pretty clear we’re heading into another recession like before—only now, the Fed has no room to borrow to provide an economic stimulus as in 2009. You can thank your GOP Congressman for that, as they gave “the spread,” to borrow a term from the bond world, to billionaires and corporations in the tax bill they passed a year ago.

The risks are rising. However, the corporations' earnings have been at a record level. Many are sitting on the pile of cash. The capacity to service the debt exists and rate spread is not significant. The rising interest rates co-relate to the rising dollar which would restrict exports. The high dollar exchange rate also reduces the earnings of large international companies. In some way it becomes feedback loop with rising interest rates reduce earnings and the prospect of lower earnings lead to higher rates. By historical standards the interest rates are low. Slow down in the economy is really a slow down from short term inducement of tax cuts which was not supposed to last for more than few quarters. The effect is fading and economy is adjusting to normal growth rate before the tax cut. It is not a harbinger of crisis on the horizon.

Many thanks for a supremely informative and slightly worrying article. It leaves me to muse... do companies place more emphasis on what their top line is, what the bottom line is, it the trends in bond markets as indicators?

I'm curious why the author didn't mention the historically high US denominated foreign debt particularly in the emerging markets. With the strengthening dollar, it is becoming clear to most foreign investors that defaults to US banks is inevitable. Look at the value of the Turkish Lira against the US dollar, I believe the estimated public & private debt exceeds 1.85T. I may be wrong about the exact number but this does not include the Euro & Yen denominated debt. Unlike 2008, we may see foreign US denominated debts (bonds) coupled with the strong dollar being the catalyst to the next recession.

The amount of total corporate debt is almost $10 Trillion, twice the size of what it was in 2007 just before the financial crises. Most of the bond holders are pension plans, and other money managers who do have certain fiduciary responsibilities to ensure the safety of these investments. I wonder if in the event of a Bond Market meltdown the people who do have these responsibility would be held accountable. This may include many large insurance and reinsurance companies throughout the world. Are there mechanism to ensure that these people lose all their assets before any of the assets of a pension fund or retirement account is wiped out? Can the US Congress ensures that the laws are in place to ensure that the little guy who normally is left holding the bag is provided a safety net and no safety net is available for the major shareholders. The current Administration has already diluted many of the CFBP regulations for some of these provisions. It appears that the only plan that this Congress has is to print more money and provide it to the ‘Too big to fail” banks, insurance companies and none to the common man who would lose everything they own.

How else would we know if we didn't read the news? The bankers are the alchemists with their spiritual leaders in the corner offices guiding the way, they set the bond interest rates based on the weather, financial climate, and everyone else just sees what they're doing and we all react to it. They are the Reality Creators, and we, the journalists and professors, everyone else, we all just see what's going on and react to it. We are The Participators. This is not an insignificant fact despite its obvious nature.

Nice article but why be alarmed by things that are normal? Falling rates almost always result in tightening spreads and rising rates almost always result in widening spreads. It would take a while to explain why, but this is very normal. Six months ago I read articles warning about narrow spreads which mean that you're not being compensated for the additional credit risk you're taking. Now they've reverted back to normal spreads and this is a cause of alarm? A slowdown in borrowing is also normal because most companies borrowed when rates were lower, just like most people refinanced their mortgages at lower rates. Nice tutorial but some historical context would have been helpful

I hope the editors are reading this comment. Two major annoying factors: first, simple editing. Headlines should not have errors---it's "Can Corporate America handle" not "American." Also, needed "the growth" not just "growth" in another line. Please don't edit by Grammarly. But hey, you are still much better than The Wash Post which has an error in almost every article! The more important annoyance: article focuses only on the impact of rising capital costs to companies. But doesn't the rise in rates help regular Americans finally get better yields on their savings? Don't increased rates help retirees depending on bond yields for their annuities? Would have been nice to have this article address the events from the perspective of not just the rich, but the everyday American.

Not to get political, but if Trump goes into the 2020 election cycle with a weak economy, it seems to me that that would increase his vulnerability to becoming a one-term president.

We watched this same economic fiasco in the mid 1980s, at the time named "supplyside economics' and 'trickle down theory' and 'Reagonomics'. After the collapse of the S&Ls, tech bubble burst, and finally the 2008 economic collapse, Greenspan acknowledged to the House committee, 'there is a flaw in my theory of 30 years'. So, what does the Trump-Pence-GOP do? They initiate the same failed economic policy, and collectively expect a different result. Dr Einstein is reported to have defined such action as 'idiocy'. The GOP seems to comport with this definition.

Lucid, clear, deep writing explaining a topic I knew just enough about to know was worth paying attention to but nothing more. The mechanics, history, and lingo of the bond market were all foreign to me before reading this and now I feel I have a much stronger understanding of what's happening in the economy beyond "the bond market is weak and that's troubling people." The work put into this article is very much appreciated.

Thank you for this very educational piece. I love the way you took a step back and described the fundamentals. I believe it is articles like this, helping the layperson like myself understand basic economic matters, that will prepare folks for future stock market changes.

I just sent this article to my kids. It’s a great, short, tutorial on basic bond investing as well as on how the bond market is a signal for the economy. Nice job. Thanks.

Here's an insight from a former bond trader. Why does Trump want Powell to NOT raise interest rates? Why has Trump repeatedly threatened and insulted Powell over raising interest rates? It's simple when u follow the money. Many commercial buildings have loans that rely upon LIBOR for their interest rate. As the US raises interest rates, LIBOR will also rise which means every building Trump owns (or his backers own) will be forced to pay more for their loans. Once again, Trump is taking care of business, his own.

Thank you for this very clearly written article. Bonds are important in the portfolios of retired people, but coverage of bond markets usually requires a reader to understand both the counter-intuitive behavior of bond prices and yields as well as industry jargon and short-hand references. It's tricky to understand either warnings or assurances about what is happening.

Stocks are wild. Bonds are dangerous. My savings account pays nothing. What's the market like for magic beans?

But wait. A mini-recession in 2015-2016? Wasn't everything going "swell, old boy," in the mouths of Democratic Party leaders, to borrow a bit from "The Great Gatsby"? Meanwhile, for much of rural, de-industrialized America, it was gone to "hell," not swell, with all due credit to Naomi Klein's take on the election. Given the state of mind of America during these great "flush" times, I can't wait to see the mood when things turn down, as surely they must, and Republicans once again make austerity the evening clothes for the political economy. What intellectual garb will you don, Nancy, Steny and Chuck? I was a Bernie Sanders supporter and I have Karl Polanyi's "The Great Transformation" and the books and speeches of Yanis Varoufakis as my guidance system.

When do these higher rates affect saving rates? Chase is still paying .001%

I learned something new today! Thank you for writing such an easy to understand article about the importance of bond market. A true journalistic service to the general public.

There is plenty of capital available to invest in projects which companies think will make money. The problem is that there is no more buying power in the public. There is no reason to build plants when there is no want to buy the product. Trumps swamp friendly tax cut put plenty of money out there to be used for company growth.

The Fed slowly removing the “helping hand” it extended to the markets, the economy?? More like a crushing fist on any reasonable, safe investment other than the gambling markets. And it seems any spread pegged to that artificially low rate, purposely designed to force a search for ever-higher returns, is now going to inflict a penalty on even the best companies. These bond amounts already boggle the mind, but for banks to take advantage of the Feds finally getting back to reality- now it is their turn to keep their rates, that spread, low. Goring their own ox- nuts.

Just want to add my 2cents to the chorus of articles commending this article as well written and informative. Thank you gentlemen.

As a corporate bond analyst, this article did a really good job explaining bonds/credit spreads/the importance of the bond market in layman's terms.

Articles like this make the cost of a Times subscription worth every penny. They are instructional, invaluable in the way meteorologists explaintion of weather and climate. I wish such reporting was available in the years leading up to the Great Recession.

Increased interest costs on loans? Yes, but an old timer such as myself is far more concerned about the economic "pinball machine" I seem to find myself in when trying to figure out the next Twilight Zonish move our President might make. As in the past we are in a period where it seems any decision you make is the wrong one. For many, many years prudent business people tended to "draw in their horns" so to speak when things got crazy. We find ourselves in crazy x 10 so I'm not sure why things would be any different this time around.

Thanks. You need to keep reminding us of the significance of the bond market until we get it!

I have to wonder how many companies that engaged in large stock buybacks after their windfall tax relief courtesy of our President and Congress used that money for things they shouldn't have (i.e. propping up share prices and executive bonuses) and are now finding it difficult to fund measures that would help build their businesses. Are the misplaced priorities of America's corporations contributing to our economic slowdown?