“The slide and collapse in investment-grade credit has begun.” That’s what veteran investor Scott Minerd broadcast on social-media site Twitter after conglomerate GE saw its bond yields surge last week amid fears that its credit rating could be downgraded to “junk”, raising the cost of servicing its $115bn debt pile. Shares in the company – once the world’s biggest by market value – have fallen in value by more than half this year. Yet Minerd thinks GE is just the start. “More investment-grade credits to follow,” he warns.
That said, Minerd doesn’t expect the Federal Reserve to ease up on its interest rate hikes any time soon. Indeed, he tells Reuters, the Fed could raise interest rates as much as five times next year, unless something drastic happens. In turn, rising rates will continue to buoy up the US dollar, which will also mean emerging markets remain under pressure.
Emerging markets aren’t the only trouble spot – Minerd is also concerned about Italy’s current budget dispute with the European Union (EU). He’s speaking from experience. In the early 1990s, he helped Italy to restructure its debt. Now he sees a greater than 50% chance of a “catastrophic” outcome, such as Italy pulling out of the euro, unless the EU allows the Italian government to boost public spending, in exchange for agreeing to use higher tax revenues to pay down its debt. “The scale of the problem if Italy blows up – it’s really hard to imagine how there’s a way to get the genie back in the bottle.”