TOP 2022 TREND DRAGFLATION: BRIDGEWATER BETS ON CORPORATE BOND MARKET SLUMP

Investment management firm Bridgewater Associates is placing bets that the U.S. and European corporate bond markets will experience a sell-off later this year, according to the Financial Times.

The “short” positions illustrate Bridgewater’s view that “we’re in a radically different world” from the one in which the U.S. Federal Reserve subsidized investments with rock-bottom interest rates, Bridgewater investment officer Greg Jensen told the FT.

“We’re approaching a slowdown,” he said.

Inflation will be harder to control than investors, Fed officials, and many analysts think, he added, which could force the Fed to raise interest rates higher and faster than expected, shunting the economy toward recession.

If the Fed is serious about reining back inflation to 2 percent, central bank officials “may tighten in a very strong way and crack the weaker [companies] in the economy,” he warned.

High-grade corporate bonds already have lost about 12 percent of their aggregate value so far this year, with Europe’s down 10 percent, ICE Data Services reported.

Companies looking to borrow or to refinance existing debt face markedly higher interest rates. If they fail to secure funding, they could face default or bankruptcy, Jensen added.

“It’s going to start getting much more expensive to borrow money,” he said. 

TREND FORECAST: The corporate bond market will become more competitive, allowing buyers to be more selective and transforming the fast and easy corporate debt market that has marked recent years.

Many “zombie companies” that have survived on the Fed’s cheap money (“Reckoning Day for the Living Dead,” 7 Jun 2022) and corporations hauling loads of junk bonds will try to refinance their debt. Many will fail and default.

A more selective bond market also means less money will be put into bonds, reducing the amount of capital available to the corporate sector, slowing economic expansion and focusing borrowing only on the most credit-worthy companies.