Falling profits and increased borrowing at U. S. companies are rattling debt markets, a sign the six-year-long economic recovery could be under threat.
Credit-rating firms are downgrading more U. S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising. Analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009.
The market for riskier debt has become snarled, raising fears that companies could have trouble repaying their obligations following several years of record debt issuance, low corporate defaults and persistently low interest rates. Reflecting those concerns, investors are now demanding more yield to own corporate bonds relative to benchmark U. S. Treasury securities.
The softening U. S. corporate fundamentals have been largely overlooked as investors focused on sharp declines in the shares, bonds and currencies of many emerging-markets nations. Many analysts say the health of China remains the largest source of uncertainty in the global economy.
But rising downgrades and an increase in U. S. corporate defaults indicate ‘some cracks on the surface’ of the domestic-growth outlook, said Jody Lurie, corporate credit analyst at financial-services firm Janney Montgomery Scott LLC. Many investors closely monitor debt-market trends as an indicator of U. S. economic health.
Bond prices for some U. S. companies have suffered. A 2024 McDonald’s Corp. bond dropped from about 104 cents on the dollar in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data.
This post was published at David Stockmans Contra Corner on October 12, 2015.
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