Page 16 - May-June 2018 GSE Report Flip Book

MONETARY POLICY MJAAYNU- AJRUYNE20210818
The unintended consequences of Zero Interest Rate Policy
“Rising corporate debt levels are definitely a risk in the long-term,” wrote Collin Martin, Schwab’s Director of Fixed Income Strategy. “Many companies took advantage of the low interest rate environment, which has persisted since the GFC by issuing more and more debt with low coupon rates, while extending the average maturity of their debt. According to SIFMA, corporate bond issuance has increased every year since 2011, and the amount of investment grade corporate bonds outstanding has more than doubled over the past decade.”
In the post crisis era, many companies loaded up on low rate debt. In this era’s low growth environment, coupled with uncertainties with regard to public policies, many companies deployed much of their debt proceeds to buy back stock. Now, the “ills” of leverage are coming home to roost, triggering downgrades. (Debt Song: It’s Not a Pretty Tune, Liz Ann Sonders and Collin Martin, 06/18/18)
6/26/2018 Debt Song: It’s Not a Pretty Tune | Charles Schwab
NONFINANCIAL BUSINESS DEBT
As % of nominal GDP
I had an exchange with my colleague Collin Martin (Director, Fixed Income Strategy) last week and here is a
summary of his thoughts:
On WolfStreet.com, Wall Street analyst Wolf Richer wrote
Rising corporate debt levels are definitely a risk in the long-term. Many companies took advantage of the
low interest rate environment which has persisted since the GFC by issuing more and more debt with low coupon rates, while extending the average maturity of their debt. According to SIFMA, corporate bond issuance has increased every year since 2011, and the amount of investment grade corporate bonds outstanding has more than doubled over the past decade.
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It’s the case that many of the proceeds from issuing debt have been used for share repurchases, dividend payouts and merger and acquisition (M&A) activity. As such, debt/net worth of nonfinancial corporates has
Source: Charles Schwab, Department of Commerce, Federal Reserve, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2018(c) Ned Davis Research, Inc. All rights reserved.), as of March 31, 2018.