Corporate bonds: where the next financial crisis will start

The next financial crisis could start in corporate bonds, as credit quality has deteriorated over the past few years and decades.

"The genesis of the next crisis is probably lurking in corporate debt," says Buttonwood in The Economist. Years of extremely low interest rates have prompted an unprecedented worldwide borrowing binge. According to the credit-rating agency S&P Global, last year 37% of global firms were highly indebted (a state defined as having debts worth five times earnings or more). That's 5% more than just before the crisis a decade ago.

Advertisement - Article continues below

Credit quality has also deteriorated over the past few years and decades. The median corporate bond is now rated BBB-, which is one notch above speculative, or junk, debt. In 1980 the median was rated A. Even in the investment-grade category, quality has dwindled. Forty-eight per cent of US corporate bonds are rated BBB, up from a quarter in the 1990s.

Meanwhile, investors seem so complacent that they are not even demanding higher rates to make up for the falling credit quality; the gap between corporate and government debt in the US and Britain is still extremely small.

Finally, banks have withdrawn from the market-making business in bonds owing to stringent post-crisis regulations, says Buttonwood. So a dearth of liquidity could exacerbate a sell-off. All this means that corporate paper thus looks extremely vulnerable to rising interest rates. "Removing the easy-money punch bowl," says S&P Global's Terry Chan in Barron's, "could trigger the next default cycle."





A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Investors are going bonkers for bonds

In a further sign of the mania gripping the bond market, Germany issued €3.15bn of zero-interest ten-year bonds last week.
18 Jul 2019
UK Economy

Mervyn King: why the Covid pandemic is a classic example of radical uncertainty

This week, Merryn talks to ex-governor of the Bank of England Merryn King about the pandemic and how to prepare for a future that is unknowable; the g…
2 Jun 2020

Most Popular

UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020