Here’s a gut check for bond investors: corporate America is now more leveraged than ever.
As this year’s corporate bond sales raced past $1 trillion on Wednesday – marking the fifth consecutive year of trillion-plus issuance – Morgan Stanley published a report Friday highlighting the growing strains on company balance sheets. The report, which estimated US companies’ collective debt at a record 2.4 times their collective earnings as of June, comes at a time of growing angst in global bond markets
‘The investment-grade ‘safe’ part of the market is becoming the most dangerous,’ said Ashish Shah, chief investment officer at AllianceBernstein LP. ‘There are so little returns out there. People are crowding into whatever they can.’
The debt metric, which doesn’t include banks and other financial companies, has climbed for five straight quarters as corporate profits decline at the same time companies load up on the increasingly cheap borrowings, Morgan Stanley analysts led by Adam Richmond wrote in a note to clients. In 2010, when the U. S. economy started recovering from the longest recession since the Great Depression, the ratio fell to 1.7 times.
This post was published at David Stockmans Contra Corner on September 11, 2016.