Investors May Be Overconfident

Investors are expressing concern about the level of debt companies are carrying rather than focusing only on growth, according to a recent Bloomberg article. The junk bond market, however, doesn’t share the same concern.

Analysis by Societe Generale SA shows that, “amid rising interest rates and growing corporate leverage, investors have cast aside debt-riddled companies in favor of cash-rich businesses,” according to the article. Societe’s global head of quantitative strategy Andrew Lapthorne asserts, “This kind of divergence is rare and, in this case, will likely correct itself with a selloff in lower quality bonds.”


Lapthorne explains, “Though rising debt levels and interest rates might set off alarms, stock volatility measures near record lows and makes asset prices look sturdy. Thus, companies appear less likely to default, and investors keep snapping up junk bonds.”

Andrew Brenner, head of international fixed income for National Alliance Capital Market, says he is fearful of the overconfidence investors seem to be expressing, characterizing it as “the same overconfidence of June 2007, right before times got bad.”

“People think investors are buying Facebook, Amazon, Apple and Google because they’re growth stocks,” argues Lapthorne, adding, “but they’re full of cash and don’t have a balance sheet risk.”