BlackMask Breaking News

• Wharton Business School Professor Joao Gomes has said the debt mountain marks a ‘moment in history’ and it could ‘derail the next administration’
• Experts are currently predicting that the eye-watering debt-to-GDP ratio will reach 190 percent by 2050 if it remains on its current trajectory 

America’s $34 trillion debt will disrupt the global economy as early as next year if the next president pursues expensive policies, a finance expert has warned.  Wharton Business School Professor Joao Gomes has said the public debt mountain marks a ‘moment in history’ – and it could ‘derail the next administration’.’Toward the latter part of the decade we will have to deal with this,’ he told Fortune. ‘It could derail the next administration, frankly.  ‘If they come up with plans for large tax cuts or another big fiscal stimulus, the markets could rebel, interest rates could just spike right there and we would have a crisis in 2025. ‘It could very well happen. I’m very confident by the end of the decade one way or another, we will be there.’ Gomes warned he doesn’t think it will be considered a big issue by either the Republican or Democrat parties.

‘It’s a really obvious moment in history for us to say: “OK, what are our choices, what can we feasibly do, who has the better plan?”‘ he told Fortune.  ‘I suspect neither party is interested in that and it might all be pushed under the rug.’  Gomes is the Senior Vice Dean for Research, Centers and Academic Initiatives at Wharton Business School, part of the University of Pennsylvania.  US national debt reached a record high of $34 trillion at the end of 2023. Data published by the Treasury Department showed that outstanding federal borrowing soared to eye-watering figure on December 29. The staggering figure, which is a major point of contention between Republicans and Democrats, is equal to $101,233 in federal debt for every person in America, according to the Peter G. Peterson Foundation. The ballooning deficit means the US government spends more than $1.8 billion a day on interest payments alone, the bipartisan group found, which it said threatens America’s economic future. Experts warn that a higher debt load could put upward pressure on inflation, keeping interest rates higher and pushing up the cost of household borrowing. It could also impact major programs including Social Security and Medicare.

OPEC+ on Sunday agreed to extend its production cuts for another quarter, but the reaction from oil markets was relatively muted as the agreement had already been priced in. Early on Monday1 morning, Brent crude was trading at $83.4, while West Texas Intermediate was sitting at $79.70 per barrel. The extension of the 2.2-million-bpd production cuts from OPEC+ was anything but a surprise. Yet making it official at the Sunday meeting sent a clear signal about the course OPEC+ will continue following. “The decision sends a message of cohesion and confirms that the group is not in a hurry to return supply volumes, supporting the view that when this finally happens, it will be gradual,” Jefferies analyst Giacomo Romeo told the Financial Times. There was one surprise out of Russia, which has said it would deepen its cuts by some 471,000 bpd in the second quarter while easing curbs on exports, to stay within its 500,000 bpd cut quota that covers both production and exports. “If the Russian cuts are fully implemented additional barrels would be removed from the market. So that is a surprise move no one expected and could lift prices,” UBS’ Giovanni Staunovo told Reuters.

“The OPEC+ rollover was baked in, it’s the Gaza crisis that prices are responding to,” Vandana Hari, founder of Vanda Insights, told Bloomberg. “As long as the cease-fire negotiations remain in a stalemate, crude is likely to either hover around current levels or come under further upward pressure.”

At the same time, analysts from ANZ said in a note today that signs of supply tightening are also exerting an upward pressure on prices. “Signs of tightness in the physical market continue to push crude oil higher. Output cuts by the OPEC+ alliance continue to reduce supply as the market worries about the renewed tensions in the Middle East,” they said, as quoted by Reuters.

Default danger rises in high-yield debt, while stress in commercial real estate ramps up

Private loans are most likely to perform best in credit as other categories of risky corporate debt face more defaults, according to the latest Bloomberg Markets Live Pulse survey. More than 40% of 387 survey respondents said private credit will outperform over the next 12 months. And that’s despite a majority also predicting weaker returns and lower quality in direct loans, as competition between lenders intensifies. Private credit generally involves lending directly to companies at higher rates than publicly-syndicated bond and loan markets offer. Those making such loans say that they can glean more information about a borrower by going direct, and secure better claims on assets if it struggles to pay back. Because the debt is usually offered at a floating rate, investors benefit when underlying interest rates stay high. It also doesn’t trade very much — if at all — making the loans hard to value, but also less volatile in investors’ portfolios when global markets get choppy. US junk bonds and leveraged loans have returned about 11% over the last 12 months, compared with a 30% gain in the S&P 500. Private debt investors expect to generate returns in the high teens without the volatility typically seen in publicly-traded debt and equity markets.

The $1.7 trillion private credit boom is drawing criticism — and the attention of regulators — for its lack of transparency and perceived mispricing of risk.

But the preferences highlighted by the survey show investors positioning for a protracted period of elevated base rates and volatility in other asset classes. The worry for some investors is that it’s hard to see when borrowers fail to pay on time because lenders can negotiate ways to keep them afloat. That’s a particular concern when high-risk companies face bigger debt payments, slumping earnings and a looming maturity wall. Some fear it’s a bubble that could burst, inflicting pain elsewhere.

On that note, most survey respondents predict that private credit margins and covenant quality will decline over the next 12 months as public markets compete more fiercely for business. High-yield bond and leveraged loan issuance has picked up this year, with demand from yield-chasing investors helping to make those markets more attractive to US corporate buyers. Even with all these potential pitfalls, private credit is a safer bet than junk bonds if the US economy stumbles, a majority of survey respondents said. In addition, the survey highlights a bearish outlook for high-yield bonds, with spreads on the debt predicted to widen to about 450 basis points over Treasuries in 12 months. That compares with just above 310 bps currently and would mark a selloff to levels last seen in the middle of last year, around the time of the 2023 regional banking crisis. That risk-off move in more public debt markets reflects survey respondents’ expectations of a rise in missed debt payments by cash-strapped companies. About 90% of survey participants predict a default rate will keep rising, after it surged to about 4.7% in US junk bonds, according to S&P Global Ratings. Still, most don’t expect that to impact financial markets more broadly. The other lurking danger for credit investors, commercial real estate, is only expected to escalate. Asked whether CRE stress will deteriorate over the next 12 months, roughly three quarters of respondents said yes. Of those expressing concern, about half think it will only hurt banks, while the rest also expect it to rip through other asset classes. Only about a quarter of survey participants expect it to bottom out over the next year. NN: the trillions of debt due to be refinanced at twice the rate will give us a black swan event

OPEC+ extended its oil supply cutbacks to the middle of the year in a bid to avert a global surplus and shore up prices. The curbs — which on paper total roughly 2 million barrels a day — will remain in place until the end of June, according to delegates who asked not to be identified because the information isn’t public. Group leader Saudi Arabia accounts for half of the pledged reduction. Traders and analysts had widely expected the extension, seeing it as necessary to offset a seasonal lull in world fuel consumption and soaring production from several of OPEC+’s rivals, most notably US shale drillers. An uncertain economic outlook in China is adding to the need for caution. Ample supplies have anchored international oil prices near $80 a barrel this year, even as conflict in the Middle East disrupts regional shipping. While that offers some relief for consumers after years of rampant inflation, prices may be a little low for many in the Organization of Petroleum Exporting Countries and its partners. Riyadh needs a price above $90 a barrel as it spends billions on an economic transformation that spans futuristic cities and sports tournaments, according to Fitch Ratings. Its largest partner in the alliance, Russia, also seeks revenue to continue waging war on Ukraine. In the first month of this year, the group’s implementation of the cutbacks didn’t live up to the pledged 2 million barrels a day. Iraq and Kazakhstan collectively pumped several hundred thousand barrels a day above their quotas, but promised to improve compliance and even compensate for any initial overproduction. Russia meanwhile, has shown a very mixed performance. It only recently fully implemented the production cutbacks it promised to make almost a year ago. In January, the nation reduced its exports of crude oil as agreed by roughly 300,000 barrels a day, but promised curbs to shipments of refined fuels were less clear. The group’s decision to extend its curbs for the second quarter may have been widely expected, but OPEC+ will likely face a tougher choice at its next scheduled meeting on June 1, when ministers will set policy for the second half of the year. Forecasts from the International Energy Agency in Paris suggest that, with growth in global oil demand slowing and new supply from the Americas soaring, OPEC+ will need to persevere with its cuts all year. “You don’t want to bring barrels back in too early,” Saad Rahim, chief economist of commodity trading giant Trafigura Group, told Bloomberg television last week. It’s unclear whether all members would be willing to subscribe to that policy. While Saudi Arabia has often urged the need for caution, its neighbor the United Arab Emirates has been keen to make use of recent investments in new production capacity. Some forecasters believe that won’t be a problem, as strengthening demand will allow the group to relax its curbs and add more barrels later in the year. There has been “an improvement in overall market fundamentals,” said Paul Horsnell, head of commodities research at Standard Chartered Bank Plc. “OPEC could increase output” without flooding world inventories. NN: this widely expected production cut announcement was timed to lesson market fallout if some kind of peace deal with Israel is agreed to in the next week. PLEASE NOTE: The differential in Brent a year out is a whopping negative $7.00. This is extreme  backwardation.