By Frances Yoon
Companies and governments have issued a record $9.7 trillion of
bonds and other debt this year, as extraordinary support from the
Federal Reserve and other central banks has fueled a borrowing
bonanza.
The total covers the year to Nov. 26 and includes nearly $5.1
trillion of corporate bonds, as well as some kinds of loans,
including riskier leveraged loans, according to Refinitiv. Both
figures already exceed those for any prior full year.
More broadly, the Institute of International Finance recently
said global debt had risen $15 trillion to $272 trillion in the
first nine months of this year, and is set to hit $277 trillion by
year-end--a record 365% of world gross domestic product. The IIF is
an industry group representing hundreds of financial institutions.
Its figures are broader, and include household debt.
The huge sums reflect how the Fed and its peers, by slashing
interest rates and buying trillions of dollars of fixed-income
securities, have helped borrowers ride out tough times caused by
the global pandemic. As markets have recovered from panic-stricken
levels in March, the extra yields, or spreads, that investors
demand to hold riskier securities compared with safe government
debt have also compressed.
"With interest rates remaining exceptionally low, and with
credit spreads having retraced a lot, it makes sense for public
sector, financial institution and corporate clients to look to lock
in funding at these very, very low levels," said Sean McNelis,
HSBC's co-head of global debt capital markets in Hong Kong.
Investors have lapped the new bonds up. "There has been no
problem in absorbing the massive debt issuance seen in 2020 due to
the combination of central-bank asset purchases and the sharp rise
in private savings," said Gene Frieda, London-based global
strategist at Pacific Investment Management Co.
U.S. corporate-bond markets make up a large chunk of overall
issuance, and have seen some of the greatest increases in
borrowing, after the Fed said it would cut interest rates to zero
and buy corporate bonds for the first time.
American companies with investment-grade credit ratings have
issued more than $1.4 trillion of debt this year, up 54% over the
same period in 2019, Refinitiv data show. Issuers span companies,
such as Apple Inc., which have been relatively unscathed by the
coronavirus pandemic and others, such as aerospace giant Boeing
Co., which have been more seriously affected. Boeing sold $25
billion of bonds in the year's biggest corporate deal.
Among riskier borrowers, U.S. junk-bond issuance has soared 70%
to $337 billion, Refinitiv data shows. American deals make up the
majority of sub-investment-grade debt globally. Companies in
industries hit hard by the economic effects of Covid-19, from
Macy's Inc. to cruise operators such as Carnival Corp. and Royal
Caribbean International, have been able to tap the market.
"It may be counterintuitive that investors will buy bonds from
cruise liners, but they're thinking ahead and expect economic
growth to return, and they're also thinking about the better
returns they'll be getting in the meantime," said Todd Schubert,
head of fixed-income research at Bank of Singapore. "Low rates
incentivize people to go to riskier assets."
Easy access to funding has helped stave off much financial
distress, by enabling borrowers to raise new debt at cheaper rates
and to refinance debts they would otherwise struggle to pay back.
In the longer term, however, high debts could increase financial
fragility.
The IIF says it isn't clear how global debt levels can be
brought back down without significantly hurting economic activity.
Sonja Gibbs, the IIF's Washington, D.C.-based head of sustainable
finance, said it was concerning that credit ratings and bond
spreads weren't fully pricing in potential risks, with spreads on
very risky triple-C-rated U.S. bonds nearing levels seen last year
before the pandemic.
Others are more optimistic. Ben Laidler, chief executive officer
of Tower Hudson Research in London, estimated at least half of the
debt raised this year by companies globally was precautionary, and
most of that was still sitting on corporate balance sheets. "We
should probably be able to deleverage pretty quickly," he said.
Emerging markets could prove especially vulnerable. In general,
these countries and their businesses have borrowed less liberally
than the rich world, although there have been some eye-catching
deals, such as one by Peru, which recently sold $1 billion of bonds
that don't come due until 2121.
Still, emerging countries are more reliant on foreign-currency
borrowing, have fewer sources of funding than developed countries,
and often lack independent central banks, said Ayhan Kose of the
World Bank's Prospects Group, which analyzes the global
economy.
Emerging government debt has risen nearly 10 percentage points
to 61% of GDP this year, its largest one-year increase since the
late 1980s, and the pandemic has made a string of financial crises
more likely, Mr. Kose said.
Write to Frances Yoon at frances.yoon@wsj.com
(END) Dow Jones Newswires
November 30, 2020 05:44 ET (10:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.