Ep. 570 – Uncle Sam’s Debt Is Junk

The Kapital News
The Kapital News
Ep. 570 - Uncle Sam's Debt Is Junk
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We say it on a near daily basis when covering market performance, and that is calling out Uncle Sam’s debt as junk. It is not said to be facetious or to act as a wise-guy, but rather to admit reality. Currently, junk bond or high yielding debt is trading near all-time lows and is trending lower. Meanwhile, the US 10 year note and 30 year bond, are trending higher. There has never been a time when these yields have converged and rightly so. US debt is supposed to be risk-free, whereas junk bonds are called junk because there are several inherent and obvious risks. The higher the yield, the higher the chance of default. During the GFC, high yield hit nearly 23 percent! This was an example of markets functioning in attempts to accurately price risk. Well not this time. While it is true that yields spiked during the onset of the pandemic, rising to over 11 percent, they quickly came back down. The reason was because of fiscal and monetary measures. Emphasis given to monetary measures, because the Federal Reserve created various emergency facilities to purchase corporate debt and they did. Not only did the Fed purchase corporate debt on the secondary market, they also purchased it directly from the companies themselves in the primary market. Many of these companies were far from being junk rated as some were the largest firms in the world. So not only did the Fed purchase US corporate debt, but also foreign corporate debt!

By undertaking such measures, the Fed also sent the signal to the markets that they will be there to cushion and even perhaps prevent, any sort of further sell-off in the corporate debt market. What this then translates into is comfort and confidence of investors to get back into the game because they believe they have an insurance policy from the Fed. That is to say that should corporate bonds sell-off again, the Fed will purchase them and make the investors whole or at least lessen their losses. This goes completely against the Fed’s charter and any semblance of free-market functioning. This also goes against logic, because it can be argued that this economic lockdown was worse than the GFC and many economic variables conclude as much. Thus junk bond yields should be much higher. However, they are not due to the centrally planned actions undertaken by the Federal Reserve.

All of this has thus led to junk bond yields being at record lows. Should this downward trend continue in concert with rising US government debt yields, they may very well converge, although not likely. At this juncture there will be no denying that Uncle Sam’s debt is junk. It is important to stress that the Treasury market and corporate debt markets, along with others, are being greatly manipulated due to these policies. This in turn creates great distortionary effects and one of the biggest and most problematic is the mispricing of risk. In essence, without such policy interference, yields on Treasuries and corporate debt would likely be much higher. Furthermore, the spread in yields is tightening even as we have Fitch Ratings issuing a note forecasting a wave of bankruptcies across 2021 and 2022 as fiscal and monetary measures are scaled back. So understand that we have added trillions of dollars to our national debt, our trade deficits are at record highs, and we are still going to have to contend with a countless number of bankruptcies and insolvencies. Then what was the purpose of all of this money spending, borrowing, and printing if we still have such economic devastation on the horizon? These actions, coupled with these yield spreads tightening, and several other data points are indicative of a system that is nearing exhaustion. Policymakers understand the extent of their Ponzi scheme better than anyone and thus we are witnessing one extreme policy after the next to keep it all afloat for as long as they can. But remember, they cannot keep it going forever, and the longer they do, the bigger the fall and negative consequences. Abuses of power and billions and trillions of dollars are stolen right in front of our faces, and nothing is done about it to stop this madness. We need to wake up and we need to wake up now! Stay diversified, stay vigilant, and stay with The Kapital News. #Economy #Debt #Inflation #USA #FoodPrices #Liberty #Protests #Revolution #EndTheFed #Leadership #bananarepublic #FireCongress #JunkBonds

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