Economic turmoil: Bond and gold markets scream trouble, while share investors party on

Investors piled into safe-haven assets bonds and gold on Friday as signs of rising bad debts among consumers and businesses in the US sparked worries a downturn could spread to the global economy.

While bond and gold investors are betting on economic trouble ahead, share investors remain optimistic about the prospects for artificial intelligence to reshape the business world.

It is unusual for bond and gold investors to be so out of kilter with the optimism of equity investors, although beyond the craze for AI stocks there are widening cracks in share markets.

The divide on the outlook among capital markets investors has widened in tandem with geopolitical tensions, as President Trump’s trade war on the rest of the world is the backdrop for major international meetings for the World Bank and International Monetary Fund in the US this week.

Bond investors are worried

On Friday, ASX-listed gold miners surged again as the metal traded at a record $US4378 ($6766) an ounce, as the benchmark S&P/ASX 200 index retreated 0.6 per cent from Thursday’s record high of 9109 points. Government bonds, seen as a shelter from a potential fall in riskier assets, also surged.

The yield on the benchmark US 10-year treasury bond fell 20 basis points over the last week to 3.96 per cent Friday morning. Over the past three months the US 10-year yield is down 45 basis points and year-to-date is down 61 basis points.

Australian government 10-year bond yields have fallen 24 basis points from 4.37 per cent this time last week to 4.13 per cent on Friday.

The sharply declining yields suggest influential bond market investors are worried about the economic future and prepared to accept lower risk-free returns, or yields, for holding safe bonds.

Thursday’s data that showed Australia’s jobless rate rose to 4.5 per cent in September, also fuelled bets the Reserve Bank will cut interest rates on Melbourne Cup Day as the local economy is softening.

US bad debt, private credit problems

On Thursday, pockets of US share markets posted more steep losses on growing evidence many businesses and low-income consumers are suffering from cost inflation and the rising cost of living.

“The volatility in regional (US) banks, combined with the recent collapse of subprime lender Tricolor Holdings, has investors questioning the broader health of US credit markets,” National Australia Bank said Friday.

Zions Bancorp sank 12 per cent after flagging $50 million in bad debts on Thursday, and Western Alliance Bancorp tumbled 10 per cent as investors dumped its shares on write-off worries.

Shares in private market lending giants KKR Inc, Ares and Blackstone have also been dumped over the past three months, with falls of 19 per cent, 21 per cent, and 14 per cent respectively.

In Australia, KKR’s ASX-listed private credit fund the KKR Credit Income Fund lost 1.8 per cent on Friday to $2.21 per share and it’s down 6.3 per cent in October. The circa $800 million fund now trades at nearly a 10 per cent discount to the reported value of its assets to suggest investors are uncertain about private credit.

In September, Australia’s financial regulator temporarily suspended the operation of one of Australia’s largest private credit funds and warned it’s worried many standards across the sector are inconsistent with financial services laws.

Setting aside corporate bluster, the reality is that repackaging low-quality sub-prime debt offered to home loan borrowers and selling it on to investors is what triggered the Great Financial Crisis of 2008/09 when the borrowers couldn’t pay it back.

This time round the debt being repackaged is not home loans to US borrowers at high risk of default, but loans to small-to-medium sized businesses.

In October, two big sub-prime borrowers in the US, car loan company Tricolor and car parts maker First Brands, went bankrupt.

The First Brands collapse has sent shares in US investment bank Jeffries 26 per cent lower over the past month as the car parts maker had $US1 billion in bad debts owing to lenders - including Jeffries.

Notably, the growing stink around private credit in the US is yet to flow through to broader share market valuations despite the alarming parallels with the causes of GFC of 2008/09.

The animal spirits in share market investors remain alive and well, with the warnings signs from bond and gold market investors being ignored, for now.