- Dow Jones futures were off by as much as 823 points in after-hours trading, threatening to undo all of Thursday’s gains.
- Stock trading remains highly volatile as investors weigh the ever-growing impact of coronavirus on public health and the economy.
Coronavirus could be the pin that pops corporate America’s debt bubble.
Futures on the Dow and S&P fell sharply Thursday night and were on track to give up all their prior gains, as the economic impact of coronavirus continued to sweep through the financial system.
As The Wall Street Journal reported Thursday , an upsurge in risky corporate debt could topple the US economy at a time when business activity was grinding to a halt. According to the Journal’s analysis, coronavirus could be the pin that pops the ever-growing debt bubble.
Dow, S&P 750, Nasdaq Futures Decline
Futures on all three major US indexes traded lower Thursday night, pointing to a volatile start to New York trading on Friday.
The June contract for the Dow Jones Industrial Average was off by as much as points, en route to a low of 40,
S&P futures were down 1.7% to 2, . . Nasdaq Composite futures declined 0.7%.
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Beyond the oil and gas sector, markets remained on edge over the coronavirus pandemic. The
Risky Corporate Debt Threatens to Topple US Economy
The historic surge in corporate debt was a problem even before coronavirus became a pandemic. But as corporate borrowers get downgraded due to the health crisis, servicing their debt will become more onerous.
according to the Wall Street Journal , a subset of the now $ 19 trillion corporate debt mountain could be in serious trouble.
That’s because roughly $ 1.2 trillion of that total is in leverage loans and junk-rated debt “secured by corporate assets much like mortgages are backed by home. ”
This market has ballooned by nearly % over the past five years thanks to the allure of higher interest rate payments (corporate borrowers with lower credit ratings pay higher interest to their investors).
As WSJ pointed out, banks that make these loans rarely hold on to them because of post-crisis regulations. Instead, they are sold to money managers or repackaged into other securities.
When prices of loans fall or enter default …
… the losses hit pensions, insurers, and scores of mutual funds and hedge funds, some of which react by selling out, exacerbating market swings.
Corporate debt continues to grow at a time when the global economy is expected to enter a brief but painful recession brought on by coronavirus. Rising debt and economic contraction are a dangerous combination that can lead to spending cuts, layoffs and credit downgrades .
As is often the case during recessions, economic pain leads to a spike in defaults. Data from S&P Global suggest that the next recession could be much more painful for loan investors given the size of corporate debt outstanding.
This article was edited by Josiah Wilmoth
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