If history is any indicator of what lies in the near future, corporate bankruptcies will probably increase in 2009 and have an effect on exchange traded funds (ETFs) that track corporate debt.
History indicates that before equity markets can hit rock-bottom, there must be a peak in corporate bankruptcies.
In 2008, there was an increase in corporate bankruptcies by 14% and were kept at these levels due to low interest rates. As for 2009, experts suggest that the number of corporate bankruptcies is expected to rise by at least 20% on the broad reduction of credit, the diminishing value of assets used as collateral and weakening demand, states Gunnar Stangl The Financial Times.
If these defaults and bankruptcies rise according to the forecasts, there could be an impact on corporate bond ETFs, potentially in the form of increasing yields. Take a look at the iShares iBoxx $ Investment- Grade Corporate Bond Index (LQD), which is up 6.4% over the last three months and has a yield of 5.61%.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.