A 40% rout in Apple bonds is signaling trouble for bank balance sheets with big debt holdings, markets guru Larry McDonald says

Larry McDonald

Larry McDonald.Larry McDonald/The Bear Traps Report

  • A 40% plunge in Apple’s bonds highlights the dangers dealing with banks’ debt portfolios, in response to Larry McDonald.

  • The markets guru highlighted dangers tied to mortgage-backed securities, that are on monitor for a 3rd annual decline.

  • Silicon Valley Financial institution’s collapse in March, which set off a wave of banking turmoil, was brought on by the losses on its bond portfolio.

Apple’s long-term bonds have misplaced 40% of their worth since late 2020 because of the Federal Reserve’s interest-rate will increase – and that is highlighting the mounting dangers for banks from their debt holdings, in response to Larry McDonald.

The value of Apple’s 2.55% debt due in 2060 has slumped to about $61.80 from $100.59 on the finish of 2020. The majority of the declines got here since early 2022, when the US central financial institution began elevating charges to quell inflation. The Fed has lifted its benchmark charge by greater than 500 foundation factors since then.

Bonds paying a set coupon charge grow to be much less engaging to traders as market rates of interest transfer increased, inflicting the worth of such securities to fall. Earlier this 12 months, the stunning collapse of Silicon Valley Financial institution was triggered by huge losses arising from its portfolio of Treasuries, and the occasion set off a wave of turmoil throughout the worldwide banking system.

“Rates of interest up — bonds costs down. $1 million invested on this Apple AAPL bond is now value $600k, period danger is on stage right here. Now consider all these mortgage-backed securities on financial institution steadiness sheets,” the “Bear Traps Report” founder stated in a Wednesday post on X.

Mortgage-backed securities, or MBS, that are homebuyers’ loans repacked as bonds, have additionally seen sharp declines lately. BlackRock’s iShares MBS exchange-traded fund has shed greater than 18% of its worth since hitting a 2020 peak.

McDonald appeared to recommend that if the bonds of top-rated corporations resembling Apple may take such a knock from rising rates of interest, declines within the broader debt market might be sizable.

MBS securities are intently associated to mortgage charges. The US common 30-year mortgage charge surged to a 23-year excessive of virtually 7.5% this month, indicating the dimensions of value displacement within the mortgage  debt market.

Based on the Atlanta Fed’s House Possession Affordability Monitor, US house affordability has sunk to ranges decrease than earlier than the 2008 mortgage disaster.

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