Whips And Chains Keep Bond Investors Coming

Whips And Chains Keep Bond Investors Coming

about 4 years ago2 mins

Companies around the world sold a record $2.5 trillion of corporate bonds in 2019, according to a Financial Times report on Monday. But the first full week of 2020 was even busier than last year… 🏋️‍♂️

What does this mean?

As recently as December 2018 investors were bailing out of corporate bonds: with the US Federal Reserve jacking up interest rates, it looked like companies would soon find it more expensive to repay their debts – raising the risk some could fail to do so altogether.

But while 2018 was the worst year since 2008 for company bonds, 2019 whipped around to their best… ever. With US and European central banks now slashing rates and once again purchasing corporate debt themselves, businesses took advantage of low borrowing costs to raise more than $2.5 trillion for acquisitions or expansions. Even companies that saw their stock prices fall flat in 2019 – like ride-hailer Uber andsocial mediumTwitter – managed to shift millions.

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That was thanks to feverish demand. Bond investors are typically less bothered about growth potential than stock investors, focusing instead on ability to keep up debt repayments. But with so many bonds offering negative returns, they may now be taking greater risks in search of profit… 😧

Why should I care?

US companies sold $69 billion worth of “investment-grade” bonds last week – the second-biggest total in history – and weekly European and Asian debt sales hit their highest ever. But while analysts expect corporate bond issuance to decline slightly in 2020 overall, the increasing prevalence of lower-grade “junk” bonds could be concerning.

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If central banks’ attempts to boost economic growth through low interest rates fail, many heavily indebted companies may find it impossibly expensive to borrow any more money – especially since large investors are automatically forbidden from holding bonds that sink to “junk” status. Should that scenario come to pass, corporate bondage may find safe words of little help… 🙇‍♂️

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