Why A Corporate Debt's Ticking Time Bomb Could Make A 2024 Recession Inevitable, Analyst Warns

Salman Ahmed, the global head of macro and strategic asset allocation at Fidelity International, stood firm in his anticipation of an impending recession, even as Wall Street appeared increasingly optimistic about the Federal Reserve’s potential to orchestrate a soft landing for the U.S. economy.

Corporate Debt Refinancing: A Time Bomb Ticking

Ahmed issued a stark warning about the forthcoming consequences of the central bank’s tightening of monetary policy, combined with the looming specter of an economic downturn, which he expected to become glaringly evident in 2024.

What’s causing this potential crisis? A wave of corporate debt refinancing scheduled to unfold over the next six months.

Ahmed conveyed his concerns in an interview with Bloomberg, stating: “The endpoint of the cycle is recession because the transmission channel will kick in.”

He emphasized that if the Fed doesn’t ease off at some point, everyone will have to contend with higher real interest rates.

2024 Debt Maturity for U.S. Corporates: An Alarming Figure

In 2024, almost 9% of the outstanding investment-grade debt is poised to mature. Unless companies reduce their capital requirements, this debt will need to be rolled over at higher interest rates.

The elevated costs associated with servicing this debt typically constrict a company’s capacity to invest and remunerate its workforce. It is noteworthy that despite the current high stock valuations and narrow credit spreads, the impending downturn might not yet be fully factored into the financial markets.

Ahmed highlights the magnitude of the challenge, stating, “A company which financed itself at 2, 3, 4% is going to be financing at 10, 11, 12% now. That’s a huge shock.”

Preparing for the Storm

In anticipation of the approaching surge in debt refinancing set to commence in early 2024, Fidelity International adjusted its cash weighting, shifting it to overweight — a notable departure from its neutral position over the preceding two months.

Cash-like ETFs, such as the SPDR Bloomberg 1-3 Month T-Bill ETF BIL and the iShares 0-3 Month Treasury Bond ETF SGOV, saw a sharp influx of money in August.

The firm maintained a cautious stance on stocks, displaying a preference for investment-grade credit — as tracked by the iShares iBoxx $ Inv Grade Corporate Bond ETF LQD — over high-yield credit. Additionally, the company realigned its overweight position on government bonds to neutral for the month of September.

While the resilience of the American economy in the face of rising interest rates led Ahmed to revise his recession projection to the following year and decrease the likelihood from 80% to 60%, he remains convinced that an economic downturn remains an unavoidable eventuality.

His perspective aligned with a recent study conducted by Federal Reserve officials, which indicated it typically takes approximately a year for companies to experience the full impact of prior interest rate hikes, irrespective of future adjustments.

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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