Caution: Debt Gorgers
We believe the July 2016 low in the U.S. 10-year treasury yield at 1.318%* will mark a generational low in 10-year yields and with fits and starts, that rates will move higher over the next few years. The U.S. Federal Reserve’s unprecedented nine-year intervention in the financial markets has, in our opinion, artificially depressed interest rates by directly buying debt securities, which has created an easy-money environment where companies could borrow at artificially low rates and investors have not been rewarded for focusing on balance sheet strength and valuation discounts. As seen with the temporary ending of this program in 2018 and early 2019, interest rates surged without this support. Although the Fed is restarting the reinvestment of maturing coupons on its owned debt, we believe the low water mark has been set, and over the next few years rates will rise and add pressure to companies that have gorged on debt, vs. companies that have retained a low or no leverage position.
* 10-year treasury yield data sourced from Bloomberg.