Guggenheim’s Scott Minerd became the latest respected investor to declare that the widening Libor-OIS spread (which we’ve been pointing to for the past month) is the most overlooked trend in markets right now.
In his interview outlining his bearish view on markets, Minerd explained how US corporations that embarked on a debt binge during the ZIRP era are headed for a rude awakening as interest rates rise.
And the canary in the coal mine, so to speak, will be the rising Libor rate. As it continues to climb, companies could soon start experiencing difficulties in borrowing money and servicing debt.
“The thing I’m concerned about is this rise in Libor and the repricing of bank loans. If my view of the world is right, a year from now we’re going to have interest rates up 100 basis points and Libor somewhere around 3.5% or 3.25%. And believe it or not that would begin to soak up a lot of the free cash flow for below investment grade companies,” he said.
“There are a lot of companies that are zombie companies that survived the last cycle,” he said. “We just saw iHeart – any number of comapnies. As these companies have their debt repriced by the market with rates going up, it’s going to be harder and harder (for them) to stay alive.”
Adding to the stress on highly levered firms, Minerd explained, would be the Trump tax reform plan, which limits companies’ ability to deduct their interest costs.
Circling back to the flattening yield curve, Minerd explained that the Fed’s insistence on hiking will send short-term rates on a crash course with long-term rates, which are anchored.
“The 10-year note is already 3% as we’re sitting here so there’s not a lot of room for the long end to move up.
Guggenheim is, Minerd said, is “moving away” from high-yield debt and bank loans – just as the credit risk for some of the world’s largest banks is flashing red. The Libor-OIS spread has risen to its widest level in nine years this week, rising to 54.6 bps or the most since May 2009 after 3M USD Libor rose for the 30th consecutive day from 2.2225% to 2.2481%.
And as we pointed out earlier, the stress in money markets in the US, UK and Europe is rippling across the globe…
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