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By Lisa Abramowicz and Sarika Gangar
March 18 (Bloomberg) –- Corporate debt is accounting for
the biggest portion of the U.S. bond market ever, with $9.8
trillion of debentures surpassing the 2007 peak of the mortgage-
securities boom that triggered the financial crisis.
Debt issued by companies from Verizon Communications Inc.
to Caesars Entertainment Corp. made up almost 25 percent of the
$39.9 trillion in U.S. bonds outstanding at year-end, up from 19
percent five years earlier, according to data published March 14
by the Securities Industry and Financial Markets Association.
Outside the $11.9 trillion of Treasuries, corporates are the
largest component of the world’s biggest debt market.
Obligations are mounting as the Federal Reserve pulls back
from more than five years of easy-money policies that spurred
the borrowing glut. With economists forecasting benchmark yields
will rise, that’s raising concern companies facing $3.5 trillion
of maturities by the end of 2018 will find it more costly to
refinance, similar to what U.S. homeowners faced six years ago.
“The market is getting more and more similar to that 2007
time period,” Jody Lurie, a corporate credit analyst at Janney
Montgomery Scott LLC in Philadelphia, said in a telephone
interview. Investors “are going down in credit quality to the
point that it’s detrimental to potentially getting back the
The Fed has funneled more than $3 trillion into the
financial system since 2008, pushing bond yields to record lows
as it spurred the world’s biggest economy out of recession.
While the central bank is slowing monthly purchases of
Treasuries and mortgage debt, it will likely keep overnight
borrowing rates at about zero through at least mid-2015,
economists surveyed by Bloomberg predict.
With the stimulus in its sixth year and the economy showing
signs of accelerating growth, investors from hedge funds to
retirees are delving further into U.S. speculative-grade
Yields on junk bonds have fallen to 6.2 percent, 2.8
percentage points less than the average of the past decade and
0.21 percentage point from the all-time low reached last May,
Bank of America Merrill Lynch index data show. Buyers demanded
3.78 percentage points more than similar-maturity Treasuries to
own the riskiest bonds on March 5, the least since 2007,
according to the data.
“The borrowing costs are so low that corporations feel
that they have to take advantage of it,” James Kochan, Wells
Fargo Funds Management LLC’s chief fixed-income strategist, said
in a telephone interview. “Corporations have eliminated high
cost debt with low cost debt and they’re healthier because of
Companies have more than doubled their dollar-denominated
debt since 2003, when $4.6 trillion of notes accounted for 21
percent of the U.S. bond market, according to data compiled by
Sifma. The volume of corporates at the end of 2013 exceeds the
$9.4 trillion of mortgage securities reported in 2007, at the
height of the boom, when property debt represented 29 percent of
dollar-denominated bonds, the industry group’s data show.
Mortgage securities accounted for 22 percent of the U.S.
bond market at the end of 2013, Sifma data show. Government debt
was the only corner of the market bigger than corporates.
Some junk-bond investors are forfeiting protections such as
restrictions on how much more debt companies can raise, with
covenants on North American notes at the weakest level since at
least January 2011, Moody’s said in a March 11 report. A gauge
of covenant quality that increases as investor protections
deteriorate climbed to 4.36 last month from 3.84 in January,
reversing three months of improvement. The ratings firm measures
covenants on a scale of 1 to 5.
While companies are bolstering earnings as the U.S. economy
expands, they’re also increasing debt loads, keeping their
leverage relatively stable since September 2012, Bank of America
Corp. credit strategists said in a March 11 report. They sold a
record $1.52 trillion of dollar-denominated bonds last year, 42
percent more than the annual average during the previous decade,
Bloomberg data show.
Investment-grade companies will probably become less-
creditworthy this year as they boost borrowings used for stock
buybacks and acquisitions, the Bank of America analysts wrote.
Verizon, the second-largest U.S. phone company, issued the
biggest corporate-bond deal ever in September when it raised $49
billion, almost triple Apple Inc.’s previous record of $17
billion offered in April, Bloomberg data show. The company
followed up with a $4.5 billion sale this month to help repay
Companies will face $3.5 trillion of dollar-denominated
debt coming due through the end of 2018, with $885 billion of
the maturities in 2018, according to a Feb. 28 report by
Standard & Poor’s. The growing refinancing needs will coincide
with increasing borrowing costs, as economists surveyed by
Bloomberg expect 10-Year Treasury yields to increase almost a
percentage point to a median 3.63 percent in the second quarter
of 2015 from 2.68 percent today.
“Corporate issuers could find themselves with rising
credit costs and fewer refinancing options,” S&P analysts led
by Diane Vazza in New York wrote in the report.
Before the refinancing wave of the past four years, junk-
rated borrowers in 2010 had faced $1.2 trillion of maturing debt
over a five-year period. Those maturities were whittled down
after $1.3 trillion of speculative-grade issuance in the U.S.
since March 2010, Bloomberg data show.
The mortgage crisis that prompted the Fed to expand its
balance sheet to more than $4 trillion was exacerbated by a
shadow banking system of commercial-paper conduits and
collateralized debt obligations that seized up. By 2008,
mounting losses on home loans triggered JPMorgan Chase & Co.’s
emergency acquisition of Bear Stearns Cos. and the collapse of
Lehman Brothers Holdings Inc. and led to more than $2 trillion
of writedowns and credit losses by banks globally.
New rules written since 2008 have sought to bolster lender
balance sheets while curbing leverage and outsized risks taken
in derivatives markets. While signs of such systemic risk
haven’t returned to pre-crisis levels, market observers
including Fed Governor Jeremy Stein have raised concern that the
corporate-debt market is showing signs of a bubble.
Stein has said some credit markets, such as corporate debt,
show signs of excessive risk-taking, while not posing a threat
to financial stability. Fed Bank of Dallas President Richard
Fisher, a former managing partner of a fund that bought
distressed debt, said in a January speech that he’d “have to
hire Sherlock Holmes to find a single distressed company priced
attractively enough to buy.”
“Things seem somewhat calm, but that’s part of the
difficulty with this job is trying to predict what might
happen,” said Sabur Moini, a high-yield money manager at Payden
& Rygel in Los Angeles. “You just don’t know when it might
happen and what the magnitude might be.”
For Related News and Information:
Debt Exceeds $100 Trillion as Governments Binge: Credit Markets
Bond Sales Probe Seen Symptomatic of Yield Race: Credit Markets
Bond Sales Chilled in Emerging Markets Pushback: Credit Markets
To contact the reporters on this story:
Lisa Abramowicz in New York at +1-212-617-3503 or
Sarika Gangar in New York at +1-212-617-0646 or
To contact the editors responsible for this story:
Shannon D. Harrington at +1-212-617-8558 or