US Junk Bonds Post Worst Losses in Six Months, Spreads Widen

Too big to fail, nation state edition?

But yeah. I looked at how my pension funds are invested, and it's like 70% in the US. Even more than the sovereign wealth fund, which is apparently around 50% (if a quick AI search can be trusted).

Thing is, I'm not sure I will like the world where OpenAI and co. are as wildly successful as their valuation suggests either. So maybe I should invest in them, so that if it comes to pass, I at least have money?

Yeah, I really don't know what scenario leads to the US economy not dragging down the rest with it.

Is there an argument that other economies would recover better than the US, in the long term? But at that point, one could just diversify during/after the crash.

> Quite hard to diversify away though because that means missing out on AI boom

I find it easier to live with lower/no gains than in constant FOMO

> US economy in general is starting to make me nervous.

There's a little restructuring going on, so it' bound to be a bit bumpy which would make some folks nervous, but you have nothing to fear. The end result will be a stronger economy than we've had in decades, and the entire world will be better for it.

You can hedge with PUTS, move into precious metals, put your money in CHF, etc. There are all kinds of ways of maneuvering financial turmoil (albeit, sometimes with non-productive assets), but it really depends on your risk outlook, and as we all know, we're bad at predicting the future.

This AI Boom? https://www.scottishfinancialnews.com/articles/imf-and-bank-...

Avoiding it seems wise.

You'd be crazy not to be nervous about it from what I've heard, seen and read in the last 6 months.

Cash is safe. Gold is at a record high for a reason. There are still some companies worth owning.

In general, the thing to look at is the level of liquidity in the market. The liquidity is there, but the problem is there's too much uncertainty for many companies to be able/willing to invest, so it mimics a lack of liquidity.

It's difficult to say with any certainty what it means for the general economy, but your understanding of what this is saying about the junk bonds themselves is basically correct.

Whether it leads to a lot of defaults depends on a lot of factors. A sell-off in bonds can really screw a company if it happens to have immediate financing needs at the time, but otherwise it doesn't really impact the company directly. Junk bonds are, as the name suggests, known to be risky assets, so they are generally the first to be sold when things get a bit choppy and investors decide to sit the market out for a bit to see how events unfold.

This seems like it is pretty clearly a response to the recent tariff escalation so, as with all the other tariff announcements, it will depend on whether the recent announcement is a change in policy or another negotiating tactic.

You also see a lot of headlines like "worst losses in six months!" "biggest sell-off since September!" but these are fairly short timeframes and a lot of this is just trying to make some news out of the usual market noise.

This doesn't mean a lot. People made bets on lower rates which drove money into junk. Those prices renormalized to levels seen over the past year.

In fact, lots of business had the opportunity to roll their debt over the past year, so bankruptcy in the medium term seems unlikely.

The broader question is why now and so quickly. In my view, people got way over their skis in rate-based trades which drove a lot of things higher including tech multiples. This likely why we also have the NASDAQ down 3.5% in a single session.

[0]: https://www.tradingview.com/chart/?symbol=AMEX%3AJNK

US Junk Bonds can be used as an early economic indicator. Potentially indicating downturns in GDP and increases in unemployment up to one year earlier than other indicators.

When Junk Bond yields are low, it suggests investor confidence is high (and a low risk of corporates defaulting). The article notes that yields are rising, this is understood to be a signal of economic uncertainty (i.e. greater chance of defaults/increased risk of investing.)

There are considerations to be made regarding about what caused the changes - in this case the presidents declaration of additional tariffs on China. Since this is an arbitrary decision, and not say the result of an economic trend, the certainty around the correlation is lower. Nevertheless the randomness of the actions are themselves a source of uncertainty, which too scares away investment.

Bond spreads widening reflect lenders' fear that borrowers will default. So what this means is that on average people think that the lowest class of borrowers (junk) are going to struggle to repay. That means it is more expensive for them to borrow, which is going to generally discourage those companies from investing in projects or starting new things which require debt finance. So you would expect the knock-on effect to be less activity in general.

The weaker companies experience the impacts of financial stress more quickly, and investors start to flee to safety.

Running an economy based on the whims of a decrepit old man and the weirdos he surrounds himself with introduces a lot of risk. It doesn’t mean that the end is nigh, but large money flows are going towards lower risk.

Barely surviving companies might die. And stop employing people, buying and selling... Thus they can then have at least short term effects on both up and downstream...

So in worst case enough triggers might result in larger collapse. Basically big enough issue anywhere not just in AI might bring rest down with it.

> can someone explain what this means for the general economy?

Borrowing rates reflect other indices like 10-year treasuries, not short-term ones.

My slightly informed cynical opinion is that if a consensus existed for what this meant for the general economy, plenty of experts would be telling you. So, we don't know.

Feedback effects ("ripple effect" in your usage) are a genuine risk of economic systems, but by their nature they aren't predictable. You get the non-linear feedback we're all terrified of (a "crash") when some buffer or another runs dry: some notable demographic needs money, normally gets it from place X (for example: selling stock, repackaging and selling mortgage securities, raising a series B round, issuing corporate bonds, etc...) and suddenly X doesn't produce the same returns. So they need to do another one of those things, which drives that price down, which causes the demographics that depend on that resource to run dry, etc...

This is a metric for just one buffer: the amount of cash available to issuers of high interest bonds. Is that the tipping point? We don't know, and won't until it tips.

> The US junk bond rally came to a halt on Friday with the biggest one-day loss in six months, as the risk premium surged to near a four-month peak of 304 basis points. Yields climbed to 6.99%, the highest in more than two months.

> The losses accelerated after President Trump threatened to impose huge tariffs on imports from China and said he saw no reason to meet with Chinese President Xi Jinping, causing concerns about trade relations between the world’s two biggest economies.

> The weekly loss of 0.73% was also the biggest since April. The losses spanned across ratings amid the renewed tariff fears. Junk bond yields rose 15 basis on Friday and 31 basis for the week, the biggest increase in six months.

> CCC yields rose above 10% to a five-week high of 10.14% and spreads widened to a six-week high of 632 basis points. Spreads climbed 32 basis points on Friday, the most in one day since April. CCCs racked up a loss of 0.6% on Friday, the worst one-day loss in six months. CCCs closed the week with a loss of 1.05%, also the most in six months.

graph https://dgz78a1ch9fm7v.archive.ph/sxOOn/4d36a1090f1a44927848...

Yes, but there's also an indicator that the size of the losses is correlating to "size and sentiment of junk bonds", meaning, there may be a few too many building up. Ultimately, if equities seesaw enough, there can be some collapsing.