All is now bustle and hubbub in the late months of the year. This goes for the stock market too.
If you recall, on September 22nd the S&P 500 hit an all-time high of 2,940. This was nearly 100 points above the prior high of 2,847, which was notched on January 26th. For a brief moment, it appeared the stock market had resumed its near decade long upward trend.
Chartists witnessed the take out of the January high and affirmed all was clear for the S&P 500 to continue its ascent. They called it a text book confirmation that the bull market was still intact. Now, just two months later, a great breakdown may be transpiring.
Obviously, this certain fate will be revealed in good time. Still, as we wait for confirmation, one very important fact is clear. The Federal Reserve is currently executing the rug yank phase of its monetary policy. As the Fed simultaneously raises the federal funds rate and reduces its balance sheet, credit markets are slipping and tripping all over themselves.
This week, for example, seven-year investment grade bonds issued by GE Capital International traded with a spread of 2.47 percent. For perspective, this is equivalent to the spread of BB rated junk bonds. In other words, the credit market doesn’t consider GE bonds to be investment grade, regardless of if compromised credit rating agencies say they are.
But it’s not just GE debt that’s in question. Per a tweet by Scott Minerd, Global Chief Investment Officer at Guggenheim Partners:
“The selloff in GE is not an isolated event. More investment grade credits to follow. The slide and collapse in investment grade debt has begun.”
The fact is, there’s now around $3 trillion of bonds rated BBB, the lowest rating bracket above junk. How much of this debt – like General Electric bonds – should be rated junk that isn’t? We suspect the next liquidity event will clarify the answer to this question.
The real question, however, is how did $3 trillion of questionable debt pile up to such a perilous level to begin with? What follows is an attempt at an answer…
