Credit Markets Are Bracing for Something Bad

More so than any other market, credit is all about confidence. Yes, fundamentals such as revenue, cash flow and leverage matter, but as was seen with Lehman Brothers Holdings Inc., Enron Corp. and WorldCom Inc., when a borrower loses the confidence of its lenders, things can go downhill pretty quickly. And right now, some pretty influential people in the credit market are sounding less than confident.

The extra yield investors demand to own investment-grade corporate bonds instead of U.S. Treasuries expanded on Tuesday by the most since May as legendary Guggenheim Investment Management Chief Investment Officer Scott Minerd tweeted that “the slide and collapse in investment-grade credit has begun.” Minerd, whose Guggenheim Total Return Bond Fund gets a five-star rating from Morningstar, joins other bond-market titans who have also warned about excesses in the credit markets, including Marc Lasry of Avenue Capital and Howard Marks of Oaktree Capital. The impetus for Minerd’s tweet was the big drop in the bonds of General Electric, whose $165 billion of debt makes it one of the market’s biggest borrowers. CEO Larry Culp tried to reassure investors by going on CNBC Monday and expressing a “sense of urgency” in cutting debt and selling assets. Instead, GE’s bonds extended their decline as debt investors detected a “sense of panic” in Culp’s message, further denting their confidence. “The sell-off in GE is not an isolated event,” Minerd tweeted. “More investment grade credits to follow.”