In the aftermath of the financial crisis, a swath of individuals and families began a long and painful deleveraging process.
Businesses, meanwhile, quickly moved in the opposite direction—loading up on cheap debt to the point where many observers now worry that highly leveraged companies pose a threat to the global economy.
U.S. corporate debt has climbed to roughly 46% of gross domestic product, the highest on record, according to data from the Federal Reserve and Commerce Department. Businesses in emerging markets, such as China, have gone on an even bigger borrowing binge, taking advantage of ultralow interest rates and, in some cases, state-driven policies designed to propel economies forward.
So far, businesses have been able to service their debt without too much difficulty. The concern is that could change if interest rates continue to rise, making debt more costly, or if the economy slows, crimping profits.
In the U.S., leverage levels have climbed for both larger and smaller businesses. With the economy apparently on solid footing, ratings firms have often allowed larger companies, such as CVS Health Corp. and Campbell Soup Co. , to load up on debt to fund acquisitions without taking away their investment-grade ratings. That has contributed to a large expansion in the amount of corporate bonds rated in the bottom tier of the investment-grade spectrum, a trend some analysts worry could be giving investors a false sense of security about the safety of their holdings.
NEW YORK (Reuters) – The stock market’s gyrations have grabbed the year-end headlines, but another key financial market, investment-grade U.S. corporate debt, is turning in its worst yearly performance since the financial crisis a decade ago.
General Electric Co’s (GE.N) securities have weighed on both markets as the 126-year-old conglomerate founded by Thomas Edison has suffered staggering losses and asset writedowns.
GE shares have skidded around 56 percent in 2018, the fourth-biggest decline in the S&P 500 Index .SPX. GE’s $120 billion of bonds are not down as much, but the securities, which have long been a staple for fixed income managers around the globe, are among the leading drags on the main indexes tracking the $6 trillion investment-grade corporate debt sector.
GE’s bonds have crashed by around 14 percent – a monumental underperformance in bond market terms. Analysts worry this could signal worse times ahead for investment grade credit overall. According to the Bank of America/Merrill Lynch index, the sector’s total 2018 return is negative 2.5 percent, the largest drop since 2008.
The banks hit hardest by the financial crisis have retreated from overseas lending in the decade since the 2008 collapse of Lehman Brothers, marking a rare example of a sector in which leverage has been curtailed even as global debt has boomed.
The total amount of cross-border bank debt has dropped from a peak of $35.453 trillion in the first quarter of 2008 to $29.456 trillion in the second quarter of this year, a fall of nearly 17%. The decline in interbank lending—the credit banks extend to other banks—has been particularly steep.
The 10-year period of decline and stagnation is unprecedented in the records of the Bank for International Settlements, which monitors global financial trends.
The relevant measure is corporate debt service costs, not corporate debt. That’s why the peaks have been rising over time as long rates have generally fallen since 1981. t.co/TRys7h2OIp
— Anil (@anilvohra69) December 30, 2018
— Trevor Noren (@trevornoren) December 30, 2018
Government #debt as share of GDP. Ht @spectatorindex#US 🇺🇸😱
2018: 108#France 🇫🇷
2018: 96.3#UK 🇬🇧
2018: 86.3#Germany 🇩🇪🙌
2018: 59.8#China 🇨🇳
2018: 51.2#India 🇮🇳
2018: 68.9#Japan 🇯🇵
— 🚶🏻Curtis S. Chin (@CurtisSChin) December 30, 2018