In a worrying sign that credit markets are slowing down, December is shaping up to be the first month without a junk bond sale since the Lehman Brothers crash in 2008. Through the first half of the month no company has yet borrowed money on the high-yield corporate debt market. Credit crises always begin on the margins, with markets for junk bonds and other high-yield (i.e. high risk) debt freezing first. Once the crisis becomes full-blown it begins to spread to other bond markets as investors panic about the future. Eventually all borrowing and lending comes to a halt as investors decide to sit on their hands and wait for more certainty and improved market conditions.
The fact that credit contraction has already begun, with relatively little fanfare, is worrying. The last time conditions like this occurred it seemed like the whole world was collapsing, with stock markets losing up to 7-8% of their value at a time on multiple days and government officials warning that the financial system was near collapse.
Now we have stock markets that, while volatile, are still far higher than they were just a couple years ago. Unemployment is low and, despite some headwinds from the trade war with China, business conditions are supposed to be sound. The next financial crisis may very well come on suddenly, swiftly, and severely, even though all the warning signs are beginning to become evident.
With an already weakening housing market and rising consumer interest rates, signs that bond markets are beginning to show signs of uncertainty at the high-yield end aren’t a good sign for the economy overall. It’s only a matter of time before everyday consumers looking to buy a house, buy a car, or open a new credit card account will see their ability to borrow significantly hampered. The slowdown is upon us already, and investors and consumers need to get prepared before they feel the full brunt of its effects.