Having climbed to $900 billion globally, the market for corporate bonds is becoming increasingly risky, fund managers warned in a 16 January Financial Times article.
Lending standards had become less stringent before the pandemic arrived, pushing worldwide corporate bonded debt from $575 billion in 2016 to $887 billion last June. Then, during 2020’s economic crash, banks became less interested in lending to smaller businesses, seeking borrowers with high bond ratings.
Meanwhile, fund managers had stockpiled $300 billion in liquidity by the end of 2019 to snap up those new bond issues.
Also, corporate bonds are harder to sell than government issues. That earns corporate debt an “illiquidity premium,” boosting interest rates more – a heady enticement in a world where central banks’ interest rates hover near zero.
Combining those factors with interest rates pushed to rock bottom by central banks created a roaring market for corporations looking to borrow.
As a result, many corporations with risky balance sheets got loans anyway.
TREND FORECAST: As the global economies sink deeper into the “Greatest Depression,” the “borrowing of cheap money” game that has artificially propped up corporations will end as businesses go bust and bankruptcies balloon.