The problem with low rates and high debt loads

While rates are low in an absolute sense, they will be moving at a relatively fast pace when compared to recent history. A 1% increase on a loan was not so bad in the 1980’s, but today it could prove catastrophic. Adroit corporate financiers have been loading up on cheap money to boost margins, but if we are nearing the beginning of the rising part of the interest rate cycle, a small bump could cause a shock wave.

I first heard of the Copper/Gold ratio from a Barron’s Roundtable article in which Jefferey Gundlach touted the accuracy of predicting treasury yields, as of late.

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The chart above estimates that the 10 Yr Treasury yield should be in the ballpark of 260 bps. If this proves valid, an increase in debt service cost could come whenever companies start to roll over vintages due. To boot, the chart below indicates that this has been a pain point before recessions.

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Coupled with the lack of Fed Balance Sheet reinvestment, minuscule absolute increases in the cost of money could be a relatively big issue in the coming years.

 

Sources: WSJ Daily Shot

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