Moody's poured cold water on the seemingly endless feeling of euphoria surrounding the U.S. markets with a sobering note on the junk bond market Thursday morning. According to Moody's research, the astounding amount of $1.2 trillion of below-investment grade debt will come due in the next five years. That is a 14% increase over the rolling five-year maturity schedule as of the beginning of 2019, by Moody's calculations, and is in addition to the $1.1 trillion in investment-grade debt that will mature in the next five years.
The most interesting thing to me, as a long-time fixed-income investor, was Moody's contention that only 8% of the maturing junk debt is attributable to the energy industry. As oil prices have started 2020 with a whimper -- West Texas Intermediate (WTI) oil prices are down 10% thus far in January -- and natural gas prices have slipped below $2 per million cubic feet. Energy bonds are, as they almost always are, a very interesting subsector.
According to Moody's, though, 92% of the maturing junk debt is not in energy, and that should give equity investors pause as they consider committing new capital to the stock market with the S&P 500 hitting yet another fresh all-time high in Thursday's trading.
The SPDR Bloomberg Barclays High Yield Index ETF (JNK) has been a solid performer over the past year. JNK has posted 5% price appreciation in the last 12 months, which, paired with its current yield of 5.44%, presents the type of double-digit percentage return investors crave.
But does that return adequately compensate investors for default risks? Junk bond spreads -- as measured by the ICE BofAML High Yield Option-Adjusted Spread -- have narrowed by a full percentage point since October and now sit at 349 basis points. That spread is only slightly above the all-time lows that prevailed for most of 2018, and, clearly, this market has a phenomenal tolerance for both high risk and low yields.
That makes it less expensive for leveraged companies to refinance debt, but, in my experience, the coupon rate is very rarely the issue for distressed companies. Rather it is the "towers" as represented by column charts in corporate PowerPoint presentations of debt maturity schedules that lead companies to their deaths. Moody's data shows that those towers are getting closer to the left side of the chart for many companies, and it is imminence of maturity that threatens the marketers.
I believe the debt markets are sitting in a moment of complacency that is very similar to the one currently being experienced by rah-rah-rah equity market participants. Low junk bond spreads are as noteworthy as the S&P 500's low Volatility Index (VIX.X) readings, and one might surmise that nothing could go wrong. That is simply untrue. The S&P 500's roaring run during the Trump Presidency has been built on a wave of share repurchases financed, in large part, by debt. As that debt comes due, chief financial officers will have difficulty finding more fuel for the ever-burning buyback fire.
It is a worry as we head into the presidential election cycle. But no candidate has -- that I have heard, anyway -- discussed America's growing national debt pile. And no strategists on CNBC -- that I have heard, anyway -- are discussing Corporate America's debt maturity problem. When people don't worry, I worry. It's my job. So, check your portfolio and do a quick balance sheet rundown on each stock you own. It is a worthy exercise, believe me.