Yesterday, in Credit Excess, I highlighted the fact that never before has so much debt been issued by the corporate sector in the United States on such a consistent basis. Since 2011, US companies have accelerated their issuance of corporate bonds to over $1.3 trillion per annum. Today, I discuss a recent study from the folks at Investech Research that focuses on the quality of that debt, or lack thereof. In the 1980's and 1990's, the majority of corporate bonds issued came from high quality, investment grade companies, while less than 5% of issues were considered high-yield or 'junk bonds'. Over the last decade, that trend has changed dramatically. Today, the amount of junk bonds being issued has never been higher and almost caught up with new investment grade debt issuance in 2017. This surge in supply has been met with ever-increasing demand as investors reach for yield in riskier and riskier places.
Interest rates have now started to rise, which will put pressure on heavily-indebted companies and the high coupons they have committed to pay on their junk bonds. Those coupons are at risk and the rate of debt default will increase sharply when the next recession hits. Be careful out there!
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