Commentary

Yesterday markets saw a large default in the energy space.  Arch Coal filed for Chapter 11 bankruptcy citing tumbling domestic coal demand as the reason. Arch Coal’s default on $3.2 billion will raise the metals and mining sector’s trailing 12-month default rate from 11% at the end of December to 15% through today.  However, it will bring the default rate for the coal sub-sector to an unprecedented 43%, according to Fitch Ratings

Economic imbalances, anemic global growth and the bursting of the commodity super cycle has created a challenging environment for over-levered companies, a climate strikingly similar to 2008.

The current rally in U.S. equities is quite extraordinary. New all-time highs, falling volatility and broad sector participation are just a few of the characteristics of the rally that started in November 2016 and continues today. The current momentum is especially interesting considering it was born in the backdrop of a highly-contested U.S. election, and endured a December 2016 interest rate hike by the U.S. Federal Reserve, just the second such rate hike in 10 years.

While stocks are off to a strong start this year, most bond indexes are down and the risks for bond investors continues to grow. The culprit? Rising interest rates.