While Washington and Beijing are trading threats and counter threats, tariffs in the US have skyrocketed and President Trump has put the blame squarely on China. Amidst the hullabaloo about tariffs and ongoing trade war between the two nations, Steve Eisman, a hedge fund trader who became popular with his unique bets during the 2008 recession, believes that it is corporate debt that is a major problem for America.
In a recent interview, Eisman stated that if US goes through another recession, it will result in significant losses for junk bonds (high-yield bonds) and corporate bonds with a rating of triple BBB. The latter are just one step higher than the junk bonds.
Eisman is of the opinion that liquidity does not pose a problem. Liquidity refers to how quickly an investor is able to sell a bond at a fair price. Under normal circumstances, junk bonds are not that liquid since they are considered risky securities and hence, very few investors are willing to risk their money on them.
Eisman comments come at a time when the Federal Reserve’s stability sheet shows that there is an increase in new loans during the first quarter of 2019. These loans have been provided to companies that are already burdened by debt. These leverage loans are resulted in the credit standards falling. While the Federal Reserve states that the financial sector is tough, it did point out that investors appear to have a huge appetite for risk.
Randal Quarles, the Federal Reserve Vice Chair for Supervision, stated that the hype created by the media about the report makes it appear as though the world is coming to an end. He believes that leverage-loan risks are much ado about nothing.
This comes at a time when President Trump is blaming China for backtracking on the earlier deals that Beijing had agreed to. With the Chinese delegation on the way to meet their US counterparts for a two-day discussion, the global equity markets are reeling due to the uncertainty created by the US-China trade war and no solution in sight.
How the performance of the global equity markets affects the US economy is yet to be ascertained. At the moment, stocks and shares are reeling and bonds, whether junk or triple BBB, are not performing very well. The Nasdaq, Dow and S&P 500 have started the day on a poor note. If this performance continues for another few weeks (or months), it could well lead to another recession in the country, resulting in the high-yield bonds collapsing.
