David Rosenberg, strategist and chief economist of ‘The Gluskin Sheff” expects the current financial bubble to be concerned about is the stock market. He believes that widening spreads will bring the stock market bull run to an end. and has issued a credit market bubble warning.
“The corporate bond market is today’s bubble, just like the mortgage market a decade ago was the bubble back then,” he said Monday on CNBC’s “Trading Nation.”
Credit Market Bubble
“Something tells me in the next six months that we’re going to have a dramatic widening in credit spreads,” said Rosenberg. “I know what happens in the tail end of every Fed tightening cycle.”
He explains how the yield curve is telling us that we are coming to the end of a Fed tightening cycle. A credit spread “is the difference in yield between two bonds of similar maturity but different credit quality. For example, if the 10-year Treasury note is trading at a yield of 6% and a 10-year corporate bond is trading at a yield of 8%, the corporate bond is said to offer a 200-basis-point spread over the Treasury.” according to thestreet.com
If they are widening, this means that bond investors believe corporate bonds are effectively becoming riskier and want to be further compensated for the additional risk they are taking on.
“You always know that the bubble that was created by the previous mass of monetary accommodation comes out of the wash. This time around I’m not even saying it’s the equity market, per say. It’s probably more in the corporate bond market,”
Rosenberg compares a likening of the current markets to that of the mortgage bond markets right before the financial crisis a decade ago. Explaining that the corporate bond market is in a similar situation to the mortgage bond market back in 2007.
“it looks hauntingly similar to what mortgage debt to GDP looked like back in 2007, so we have a situation where over half of the investment grade market in the corporate grade market is rated BBB. They are on the cusp in this rate cycle, with mountains of refinancing risk ahead, there a lot of these companies that are going to be pushed into junk bond status.”
This will cause further widening of the markets and could be what effectively ends the credit market bubble which Rosenberg believes will Ripple throughout the entire stock markets.
Will this be the cause of the next financial meltdown or is there time still? Let us know your thoughts in the comments.
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