Corporate Debt Rises, Along with Lower Quality Bonds

Two decades ago, the size of the corporate bond market was approximately $3 trillion, with 20% of the market issued in the lowest level (Baa and BBB) of the investment-grade rating scale.

Now the corporate bond market is estimated at $5 trillion, with 49% of the market issued in the Baa and BBB categories, according to a recent report by Seeking Alpha. While the amount of debt has increased, low interest rates have boosted leverage and credit quality has declined. “The potential ramifications of this shift are enormous,” the article stated. “We are in the very late stages of the business cycle, where you want to own quality. Corporate spreads are tight to treasuries, offering nominal premiums for associated risks.”

Meanwhile, traders have been hedging their corporate bond investments by piling money into derivatives, as volumes in these instruments have increased 110% in the week ended Aug. 11, compared to the same time a year prior, a Bloomberg report noted. For most of 2017, derivatives activity was relatively muted. As of late, investors in corporate debt appear to want to mitigate the risks of potential hits to the broader economy, like hurricanes or geopolitical dust-ups.

– Nicholas Stern, managing editor

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