Corporate debt bubble
[5] The U.S. Federal Reserve noted in November 2019 that leveraged loans, corporate bonds made to companies with poor credit histories or large amounts of existing debt, were the fastest growing asset class, increasing in size by 14.6% in 2018 alone.
[8] Regulators and investors have raised concern that large amounts of risky corporate debt have created a critical vulnerability for financial markets, in particular mutual funds, during the next recession.
[3] The McKinsey Global Institute warned in 2018 that the greatest risks would be to emerging markets such as China, India, and Brazil, where 25–30% of bonds had been issued by high-risk companies.
Following the financial crisis of 2007–08, the Federal Reserve Board lowered short- and long-term interest rates in order to convince investors to move out of interest-bearing assets and match with borrowers seeking capital.
The success of the U.S. Fed in dropping interest rates to historically low levels and preventing illiquid markets from worsening the financial crisis prompted central banks around the world to copy these techniques.
[20] News in mid-2019 that the ECB would restart its asset purchase program pushed the iBoxx euro corporate bond index, valued at $1.92 trillion, to record highs.
[21] The increased purchases resulted in 42% of European investment-grade corporate debt having a negative yield, as investors effectively paid less risky companies to borrow money.
A writer for Bloomberg News opined in February 2020, "If and when the credit cycle turns, the aggressive push toward weakening protections virtually ensures that recovery rates will be worse than in 2008.
[31] The China–United States trade war that began in 2018 forced the government to pause debt reduction efforts in order to emphasize stimulus as both domestic and global demand for Chinese products fell.
In 2019, the McKinsey Global Institute expressed doubt that defaults in the corporate debt market would result in systemic collapses like that caused by the subprime mortgage crisis.
"[36] Several financial commentators expressed alarm at the economic fallout of the COVID-19 pandemic and related collapse of the agreement between OPEC and non-OPEC producers, particularly Russia, to prop up crude oil prices and resulting stock market crash during the week of 9 March 2020.
[41][42][43] A debt default by energy companies would harm the regional banks of Texas and Oklahoma, potentially causing a chain reaction through the corporate bond market.
[44] On 12 March, the spread on junk bonds over U.S. Treasuries increased to 7.42% in U.S. markets, the highest level since December 2015, indicating less willingness to buy corporate debt.
[47][48] While U.S. banks should have capacity to supply liquidity to companies due to post-2008 crisis regulations, analysts are concerned about funds holding bonds, which were also seeking to build cash reserves in anticipation of imminent client withdrawals during the economic turmoil.
[49] One U.S. analyst on 16 March opined, "The longer the pandemic lasts, the greater the risk that the sharp downturn morphs into a financial crisis with zombie companies starting a chain of defaults just like subprime mortgages did in 2008.
[54][56][57] The Fed's attempts to maintain corporate liquidity, including with $687 billion in support on 26 March, were primarily focused on companies with higher credit ratings.
The Council on Foreign Relations opined that due to the dependence of riskier companies on commercial paper to meet short-term liabilities, there would be a large increase in corporate defaults, unless aid was extended to lower-rated borrowers.
[58] Also on 23 March, the People's Bank of China (PBOC) began open market operations to inject liquidity for the first time since 17 February, and also lowered interest rates.
[62] The ability of NCR Corporation and Wynn Resorts to raise $1 billion in unsecured junk-rated debt on 7 April was seen as a sign of increased investor tolerance of risk.
[64] Also on 7 April, the Institute of International Finance identified five nation's corporate sectors with high levels of debt and limited cash that were at the most risk from COVID-19 disruption: Argentina, India, Spain, Thailand, and Turkey.
[70] Also on 9 April, ECB President Lagarde dismissed the idea of cancelling Eurozone corporate debt acquired during the COVID-19 crisis, calling it "totally unthinkable".
[74] In mid-April, traders in Asian commodity markets reported that it was increasingly difficult to obtain short-term bank letters of credit to conduct deals.
"[75][76][77] On 17 April, the $105 billion in debt issued by Mexican oil giant Pemex was downgraded to junk status, making it the largest company to fall from investment grade.
[79] Neiman Marcus missed payments on about $4.8 billion in debt and stated on 19 April that it would declare bankruptcy, in the context of the ongoing North American retail apocalypse.
[83] On 20 April, May futures contracts for West Texas Intermediate crude oil fell to -$37.63 per barrel as uninterrupted supply met collapsing demand.
The iShares iBoxx USD Investment Grade Corporate Bond, an exchange-traded fund with assets directly benefiting from Fed actions, grew by a third between March 11 and the end of April.
The chief market economist at Daiwa Securities noted, "The steps the BOJ has taken so far are aimed at preventing a worsening economy from triggering a financial crisis.
[99] A group of U.S. Republican lawmakers asked President Trump to mandate that loans be provided to U.S. energy companies through the Coronavirus Aid, Relief, and Economic Security Act's Main Street Lending Program.
They specifically mentioned BlackRock, which is a fiduciary to the Federal Reserve Bank of New York, and had declared in January that it was divesting itself of assets connected to power plant coal.
[103] In its annual review on 14 May, the Bank of Canada concluded that its three interest rate cuts in March and first ever bond buying program had succeeded in stabilizing Canadian markets.
