13 September 2020
Source: Bloomberg & Momentum Global Investment Management
What this chart shows
The chart shows annual (except 2020, which is to the 31st August) US corporate bond issuance, including investment grade, high yield and convertible bonds. There has been a surge in issuance this year with levels already trumping any full calendar year before. Year to date to August end, there has been an 83% increase in issuance compared to the same period last year. This recent spike follows the period in March when corporate bond yields rose sharply, increasing the cost of borrowing for businesses. Whilst some companies required immediate liquidity during the depths of the crisis, the rise in issuance is without doubt linked to the Federal Reserve’s pledge to buy corporate bonds for the first time, a move which pushed yields lower allowing companies to access cheaper funding.
Why this chart is relevant
This large and rapid increase in issuance has led to concerns about corporate debt levels as earnings remain suppressed, lowering interest coverage ratios. Of course, defaults and downgrades are the extension of this point. The default rate (trailing 12 months) within US high yield recently hit 5.6% according to Fitch Ratings, reaching a ten year high, and is expected to pick up further. S&P recently announced an expectation of $640bn of global fallen angel (bonds downgraded from investment grade to high yield status) debt this year, which would top the existing record of $488bn. With defaults and fallen angel debt expected to increase, it is an opportunity for active credit managers to shine.
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