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Illustration: Aïda Amer/Axios
Economic data is pointing downward and investor sentiment is turning negative.
Driving the news: Perhaps most worrisome is the massive pile of highly leveraged debt that continues to grow. Bank of America-Merrill Lynch's monthly survey of fund managers finds that, for the first time since 2009, corporate leverage is the top concern among investors surveyed.
- 52% of investors said they expect global profits to deteriorate — the most since 2008.
- 60% surveyed say global growth will weaken in the next 12 months, levels not seen since the financial crisis.
- U.S. manufacturing activity dropped in December by the most since October 2008.
- 2018's Treasury auctions saw the weakest demand since 2008, Bloomberg reported earlier this month.
- The yield spread between 2- and 10-year U.S. Treasury notes is the thinnest since 2007, and the yield on 2- and 3-year notes has already risen above that of 5-year notes, meaning a curve inversion.
UBS estimated in September that there was a "record $4.3 trillion in lower-quality corporate loans and high-yield bonds — up from $2.4 trillion in 2010 — that could ... see rising defaults if the healthy U.S. economy starts to wobble," USA Today reports.
- “I view this as the most severe threat to the economy and financial system,” Mark Zandi, chief economist of Moody’s Analytics, told USA Today in response to the UBS figures.
- Former Fed Chair Janet Yellen warned in a recent interview, “I am worried about the systemic risks associated with these loans. There has been a huge deterioration in standards; covenants have been loosened in leveraged lending.”
Still, there seems to be a consensus among many in the market that it's not yet time to panic.
- “Investors remain bearish, with growth and profit expectations plummeting this month,” said Michael Hartnett, BAML's chief investment strategist. “Even so, their diagnosis is secular stagnation, not a recession, as fund managers are pricing in a dovish Fed and steeper yield curve.”