US Corporate debt tips US$10 trillion
(3 December 2019 – USA) A decade of record low interest rates has allowed companies to sell record levels of bonds to investors, sending total US corporate debt to nearly US$10 trillion, or a record 47 percent of the overall economy.
The US Federal Reserve, the International Monetary Fund (IMF) and major institutional investors such as BlackRock and American Funds all have sounded the alarm about the mounting corporate obligations. If downgrades occurred at the same rate as during the 2009 crisis, the volume of debt hitting the market could be well above the normal daily sales, the Bank of International Settlements in Basel, Switzerland, warned earlier this year.
Amid the avalanche of debt, the sharp growth in lower-quality corporate bonds, just one notch above junk, represents a special concern. Investors hold nearly US$4 trillion in these bonds, including US$2.5 trillion from U.S. companies, according to the credit rating agency Standard & Poor’s (S&P).
Some analysts played down the risks. Much of the rise in the amount of BBB bonds stems from deep-pocketed companies that were downgraded as the result of strategic choices rather than poor financial management.
“You can definitely think of an Armageddon scenario. We’ve tried to keep things going by encouraging debt. Perhaps in hindsight, it should have been used better for capital expenditures and productivity, and that’s what concerns us.” commented AXA Investment Managers Senior Credit Strategist Gregory Venizelos.
Subscribe