The recent zeal for U.S. investment-grade bonds has been well documented.
Companies are selling the debt at a record pace, and investors are so hungry for it that they're accepting lower and lower yields to own it.
But there's been less focus on the fact that these notes have been lower quality on average with longer maturities. And that is going to be a problem in the long run because one hiccup could have substantial effects. Entire indexes could easily go into a tailspin if one big company gets downgraded just a few notches or if longer-dated rates rise.
AT&T, the biggest nonfinancial issuer of dollar-denominated company debt, is a perfect example. The company, which is among the lower-rated investment-grade borrowers in the U.S., spent Thursday shopping around the year's biggest corporate-bond offering, at $22.5 billion, including a portion that matures in 41 years, according to people interviewed by Bloomberg News.
This fine chunk of change just adds to the more than $100 billion of debt the company already has outstanding. AT&T seems fairly immune to a downgrade for the time being, but a lot could change. And when you start trying to predict what mobile phone service -- or entertainment -- might look like in 41 years, well, let's just say a lot can change.
Just looking at the broader U.S. investment-grade bond index, AT&T is part of a trend of lower-rated companies issuing a greater proportion of debt. Borrowers with BBB tier ratings account for nearly 48 percent of the total Bank of America Merrill Lynch U.S. Corporate bond index today, compared with 38 percent six years ago. The amount of this debt has more than doubled since 2010 to $2.8 trillion.
And the average maturity of all U.S. investment-grade bonds has lengthened, meaning that holders of the securities are more prone to losses if longer-term borrowing costs increase. Meanwhile, some of the biggest issuers have been telecommunications companies, such as AT&T, which are prone to seismic shifts in technology.
Of course, none of this will matter. Investors just want yield right now, and they're convinced that absolutely nothing will shake that demand for the time being. But at some point all these facts will be relevant to investors again, and probably at the worst possible time.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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