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Corporate debt defaults could trigger the next recession

Sam Ro
Managing Editor

Concerns over what could be an impending recession have only intensified as market volatility spikes and economic metrics deteriorated in recent months. But what could be the trigger that sends the economy into a full-blown downturn?

Guggenheim Partners’ Scott Minerd warns that it could be a spike in corporate debt defaults.

“Whether the recession causes the defaults or the defaults cause recession, I don't know how the causality runs,” Minerd said to Yahoo Finance anchor Julie Hyman at the World Economic Forum in Davos . “But I think, you know, we've got some runway left. I think another year or so of this before the defaults start to kick in. But, you know, we've got a little bit of a flavor for it over the last six weeks with some of the things we've seen in the corporate bond market, and I think we're just getting warmed up for the real party.”

Minerd’s thesis is based on the fact that corporations have taken on increasing amounts of debt during the recovery, making them more vulnerable to economic slowdowns and rising interest rates.

“When you look at leverage in the corporate sector, whether you want to see it in absolute terms, or as a percent of GDP, or as a percent of corporate earnings, we have never been this levered,” he noted.

In recent weeks, traders have scaled back their expectations for interest rate hikes by the Federal Reserve . And a Fed reluctant to tighten monetary policy would be favorable for levered companies sensitive to interest rates.

Minerd, however, warns against getting too complacent when it comes to the Fed.

“The Federal Reserve, I think, will get back into the interest rate hiking mode,” he said. “We're beyond full employment. The economy is growing faster than potential. And somewhere, you know, in the next six to 12 months, I think the Fed is going to realize, you know, inflationary pressures are mounting, and they're going to have to react to it.”

For more of Minerd’s thoughts, watch the interview above.

Sam Ro is managing editor at Yahoo Finance. Follow him on Twitter : @SamRo

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