Moody's warned recently that corporate credit quality is in its biggest slide since 1991. When Federal Reserve Chairman Alan Greenspan said this past week, in essence, that the economy had cooled down enough for his liking, one of the cooler spots he was talking about was the bond market. When a company needs money for a new factory, for example, it can use its equity for cash by issuing new stock. But that only works when the company's stock is rising. When stocks are dropping, as they have this year, corporate America has to return to the debt markets and issue bonds.
Stock is the sexier, more closely watched market, but debt is bigger.
While we've been getting queasy watching the stock markets swing, bonds quietly have been getting battered, due in part to risky loans that have gone bad. Moody's predicts the default rate will hit an unprecedented 9.1 percent a year from now. The actual number of defaults this year will also set a record. Third-quarter defaults included AMF Bowling Worldwide and Galaxy Telecom. The debt market may be paying the price for the success of the economy during the late 1990s, Hamilton said.