U.S corporate debt has hit a new milestone and could pose significant dangers should the economic downturn persist. A new report by Bank of America analysts indicates that U.S corporations owe creditors as much as $10.5 trillion, nearly half the total U.S GDP.
U.S Corporate Debt
The massive debt holdings in the form of bonds and loans come from high investment-grade companies that have been pilling debt over the years. The AAA to BBB segment of the corporate debt market accounts for nearly $7.2 trillion of the total debt.
Foreign investors account for a big chunk of holdings in the corporate bond market at about 27%. Foreign investors are closely followed by funds, including mutual and exchange-traded funds with a 22% holding.
Junk Bonds Concerns
While a good chunk of the debt is held by companies with a higher credit rating, the firms ought to trim back their debt obligations as soon as the economy bounces off the COVID-19 shocks and earnings pick up.
There is a cloud of concern that half of the corporate debt at $3.6 trillion could pose significant challenges going forward. The fact that half of the debt is held by companies within the borderline BBB credit lines means it is only a step away from the junk territory. A sustained economic downturn could result in massive defaults resulting in downgrades of the bonds to the junk bond market.
Chinese Government Bond Listing
Amid the soaring U.S corporate bonds, Chinese government bonds are poised to be included in a major global index. The FTSE Russell is poised to start listing Chinese government bonds in its World Government Bond Index WGBI, which Goldman Sachs says could draw an additional $140 billion. The addition of Chinese government bonds comes a year after the FTSE Russell declined to include the bonds over standing concerns about market liquidity and trading flexibility.
However, in the recent past, Chinese authorities have published a number of rules that have enhanced access to the $16 trillion bond market. The new rules are believed to have enhanced liquidity levels, conversely prompting inclusion in the WGBI index.
The inclusions of the government bonds in an index of FTSE Russell status is expected to fuel increased foreign investment flows. In a research note to investors, Goldman Sachs reports that a 20-month phased-in-inclusion period could result in inflows of about $7 billion per month.
The Chinese Yuan is also expected to benefit a great deal with the listing of the government bonds, with analysts expecting the currency to strengthen against the majors. For instance, August marked a 21st straight month whereby foreigners increased holdings in Chinese bonds leading to the firming of the Yuan and driving yields higher.
EDF Green Bond
Separately, France integrated electricity company EDF Group has launched landmark offerings for green bonds, convertible into new shares for a nominal amount of $2.4 billion. The company has also confirmed plans to issue two new tranches of Euro-denominated Hybrid notes. The proceeds will allow the company to double its net installed renewable capacities or more than 50GW by 2010.