While there is no direct link between the High Yield bond market in the US and Emerging Markets equities, their behavior since the financial meltdown in 2009 has been eerily similar. Following their collapse along with US equities in 2009, both markets rose sharply only to top out below previous highs a few years later, in contrast to US equities. Moreover, this year both Emerging Markets and High Yield declined significantly while US equities were mostly unchanged. One explanation for this behavior is declining risk appetite as the Fed withdraws liquidity. But a more fundamental reason is the rising debt burden of corporate America in the face of declining earnings and of slowing Emerging Markets.
Fears regarding debt servicing usually show up first in the value of the riskiest debt and equities. The current convergence of price declines in High Yield and Emerging Markets thus follows this script. But it also raises concerns more generally – heightening the risk of declines in US equities. (See our previous features – Mispricing Risk? and Earnings Headwinds).
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