● M2 Surge to Junk Bonds, Bitcoin Signals Nasdaq Plunge 9-Month Risk Alert

[In-depth Analysis] The Whereabouts of M2 Liquidity: Money Flowing into Junk Bonds, Bitcoin & Nasdaq Signals, and September Risk Scenarios

Key takeaways covered in this article: How record-high M2 money supply has flowed into the junk bond market, why this could be a precursor to credit risk rather than just a ‘bullish asset’ signal,

Short-term cycle signals gleaned from the leading/lagging relationship between Bitcoin and the S&P 500,

Market vulnerabilities caused by the concentration of market capitalization in the top 10 companies,

And the ‘structural meaning of the surge in junk bond issuance’ that other media outlets often overlook, along with practical indicators to check immediately,

Finally, we summarize three possible scenarios for September and investment strategies.

1) Current Situation Summary – From the beginning of the year through July: M2 Money Supply and Fund Flows

Since the start of the year, the US M2 money supply has continuously hit record highs.

While the general expectation is ‘injected money → inflow into stocks/cryptocurrencies → asset price appreciation,’ the actual flow is more dispersed.

The most notable fact is that junk bond (high-yield) issuance recorded its all-time monthly high in July.

Junk bond issuance in July was approximately $240 billion, marking a record high on a monthly basis.

In other words, direct evidence of a portion of the injected M2 liquidity ‘flowing into junk bonds’ has emerged.

2) Evidence of Junk Bond Overheating and Inherent Risks (Chronological: Q1 → Q2 → July)

Q1: The downgrade ratio in credit rating adjustments already increased, with the downgrade ratio around 50% in Q1.

Q2: The downgrade ratio further increased from Q1, and the default rate began to rise, surpassing the 30-year average.

July: As demand surged due to the issuance spike, junk bond prices rose, and consequently, yields (spreads) declined.

The problem is that ‘corporate fundamentals’ have not improved.

Companies facing cash flow pressure due to rising raw material and component costs, as well as tariff and supply chain impacts, are raising funds through junk bonds.

This combination is creating a temporary expansion driven by the interplay of ‘demand (liquidity) and supply (funding needs)’,

However, there is a significant risk of spread re-widening and a surge in default rates if expectations for interest rate cuts are dashed or the economic slowdown intensifies.

3) Leading Indicator Relationship Between Cryptocurrencies and Stocks – Bitcoin’s Signal (Chronological: January → February → March-April)

Looking at the trend from the second half of 2024 up to mid-August, Bitcoin has shown a pattern of forming highs and lows ahead of the stock market.

For example, Bitcoin’s high on January 21st was followed by the S&P 500’s high around February 20th, approximately a month later.

Similarly, Bitcoin’s low on March 11th preceded the S&P 500’s low on April 7th.

This indicates that Bitcoin tends to reflect ‘risk-on/risk-off’ sentiment more quickly,

And suggests that Bitcoin’s movements can be used as a gauge of risk appetite from a short-term cycle perspective.

4) Concentration Risk of Market Capitalization – The Weight of the Top 10 Companies (Chronological: Past Cycles → Present)

The market capitalization share of the top 10 companies in the S&P 500 has reached an all-time high of approximately 40%.

This concentration is overwhelmingly high compared to historical levels.

Consequently, increased volatility in these large-cap stocks inevitably leads to rapid fluctuations in the entire index.

Especially in September, a historically volatile month, any amplification of risks related to the earnings, news, or policies of these top companies could easily spill over into broader market risk.

5) Key Points Often Overlooked by Other Media Outlets (Exclusive Insights)

Interpreting the surge in junk bond issuance solely as a ‘risk-on’ phenomenon is dangerous.

The real issue is the structural flow from ‘corporate pressure on real sector costs → need for short-term liquidity → fundraising through junk bonds.’

In other words, liquidity not only flows into asset markets (stocks, cryptocurrencies) but is also used to keep financially vulnerable companies in the real sector afloat.

This process, when combined with expectations of interest rate cuts, inflates ‘hidden leverage,’ but if those expectations are unmet, it can trigger cascading effects in ‘shadow banking’ (CLOs, hedge funds, leveraged ETFs, etc.).

This is an aspect that most news reports fail to explain in depth, often stopping at the level of ‘increased issuance’ or ‘narrowing spreads.’

6) Indicators to Strictly Monitor (Practical Monitoring, Chronological Observation Points)

Immediate Checks (Short-term): High-yield spreads, monthly junk bond issuance volume, net inflows/outflows for fixed-income ETFs/funds.

Short-to-Medium Term Monitoring (Weeks to Months): Corporate cash balances vs. maturing debt, credit rating downgrade ratios, spreads on CLOs and structured credit products with leverage.

Medium-Term Monitoring (Quarterly): Default rates (annualized basis), changes in the Fed’s hawkish/dovish rhetoric, trends in CPI/PCE inflation data and employment figures.

Threshold Examples (Warning Signals): If high-yield spreads widen to over 400-500bp, or if the junk bond default rate significantly exceeds the 30-year average, it signals a risk.

Also, if the ratio of Nasdaq’s market capitalization to M2 remains at historical highs, be mindful of ‘valuation bubble’ risks.

7) September Market Scenarios and Investment Responses (Chronological: Short-term (1-3 weeks) → Medium-term (1-3 months) → Alternatives)

Scenario A (Optimistic): Clear signals of interest rate cuts from the Fed, leading to market confidence recovery.

Impact: Coordinated rallies in junk bonds and stocks, further narrowing of spreads.

Response: Selective credit investments (high-yield with strong fundamentals), small increases in growth stocks/ETFs, caution with leverage.

Scenario B (Base Case): Delayed interest rate cuts or continued uncertainty leading to increased volatility.

Impact: Sustained demand for junk bonds but a gradual rise in default rates; stocks fluctuate, driven by top-tier companies.

Response: Secure cash positions within the portfolio, increase holdings of quality bonds and cash liquidity, consider hedging (put options, inverse ETFs partially).

Scenario C (Pessimistic): Expectations for rate cuts completely disappear, and the real economy significantly weakens.

Impact: Rapid widening of spreads, widespread defaults in junk bonds, synchronized sharp declines in the index driven by corrections in large-cap stocks.

Response: Reduce exposure to high-risk assets, increase holdings of safe-haven assets (cash, short-term Treasury bonds), minimize exposure to credit risk.

8) Practical Checklist for Investors (Execution Timeline)

Short-term traders: Utilize Bitcoin and Nasdaq’s leading signals as short-term risk-on/risk-off triggers.

Medium-to-long-term investors: Actively consider diversification and rebalancing to mitigate the risk of top-10 concentration.

Bond and credit investors: Avoid new entries into high-yield without stringent credit screening and maturity management.

Institutional and large position holders: Re-evaluate exposure to hidden leverage in CLOs and leveraged structures, and conduct stress tests for spread shocks.

9) Final Summary – Key Message (Differentiation from Other Media)

1) Record-high M2 money supply does not immediately flow solely into stocks and cryptocurrencies.

2) Some liquidity flows into junk bonds, playing a role in ‘corporate survival,’ and this is heavily reliant on expectations of interest rate cuts.

3) Bitcoin remains a valid short-term risk-on indicator, and the leading/lagging relationship between Nasdaq and the S&P can be used as an investment signal.

4) The concentration of market capitalization in the top 10 companies increases the possibility of a shock in one stock transferring to the entire market.

5) The most crucial aspect is understanding the ‘direction of liquidity (where it is flowing)’ rather than simply looking at the ‘magnitude of liquidity.’

< Summary >

Record-high M2 money supply has led to some funds flowing into junk bonds, with July’s junk bond issuance marking an all-time monthly high.

The surge in junk bond issuance is a structural phenomenon stemming from corporate cost pressures and the need for financing, and it is highly dependent on expectations for interest rate cuts.

Bitcoin has recently shown a tendency to lead the stock market, and can be utilized as a short-term risk signal.

The market’s vulnerability has increased as the market cap share of the top 10 S&P 500 companies has reached an all-time high of approximately 40%.

Practical checklist: Regularly monitor high-yield spreads, junk bond issuance volume, credit rating downgrade ratios, and corporate cash balances versus maturing debt.

[Related Articles…]

Summary of the impact of record-high M2 money supply on asset markets

Analysis of the surge in junk bond issuance and corporate default risk

*Source: [ Maeil Business Newspaper ]

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