Stocks

Are Corporate Bonds A Leading Indicator Of The Equity Markets???

Western economists used to say that zero percent rates were a weird and unique thing you only saw in Japan — like people eating raw puffer fish and hoping not to die. It would never catch on over here, they said.

But the Bank for International Settlements — the central banks’ central banks — says there is something to worry about, and it’s the reason that economic growth, inflation and interest rates can’t get off the ground: zombies.

These “zombie” companies can stay alive — or whatever the correct term is for zombies — if they can just keep borrowing. Bankers call this “extend and pretend” (as in, “extend the term of the loan, and pretend it’s ever going to be repaid.”)

And when money gets cheaper, that’s great for zombies. Lower interest rates are correlated with rising numbers of zombie companies, the BIS found.

Source

Interest rates going down is a bad thing, despite the Equity Markets going up on any type of news that a rate cut is going to happen.  Interest rate cuts mean, the economy is actually decelerating and acts a stimulant. 

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) invests and seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds.

So think about it, although rates a low if corporations have a hard time paying back the bond holders, that means they are making less profits.  The Equity Markets rise and fall based on projected earnings.  Although not perfect, it’s one of the reasons why the ETF, LQD is a great indicator of where the Markets ahead next.

NOTE: the light blue line represents the SPY. LQD at times either tipped out or bottomed out first.

This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.

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