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The Pandemic Supercharged the Corporate Debt Boom
Stressed companies piled on debt as interest rates plummeted, but could face a reckoning in the next economic downturn
by Sam Goldfarb, The Wall Street Journal, 6/14/2021

After a brief spike [in March 2020 when Covid-19 hit], interest rates on corporate debt plummeted to their lowest level on record, bringing a surge in new bonds. Nonfinancial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high, according to Dealogic. By the end of March, their total debt stood at $11.2 trillion, according to the Federal Reserve, about half the size of the U.S. economy....This year, triple-C bond issuance is running 35% above the previous record...

In a May report, the Federal Reserve noted that, by one measure, investors had rarely been compensated any less for the risk of holding corporate bonds, even as stock valuations were in line with historical averages. The report concluded that “vulnerabilities arising from business debt remain elevated.”...
[end quote]

The low interest rates on weak debt wouldn't be possible if the Federal Reserve had not cut the fed funds rate to zero and also bought corporate bonds when Covid-19 hit. The expectation that the Fed will buy corporate debt again in a future crisis (although this is explicitly against their mandate) is supporting the low yields.

Some of the companies that borrowed in 2020 are already paying back the debts. (Such as Target, which had unexpectedly strong sales.)

Companies with low-interest debt will be hit hard if they have to refinance during a recession.

The investors in the huge amount of corporate will be hit hard if/ when interest rates rise and during the next recession when some of these companies (which wouldn't have survived 2020 without the flood of cheap money) go out of business and default.

This is an enormous amount of money. Lenders are taking big risks for tiny rewards. Even the Fed thinks that bonds are way overvalued compared with stocks -- and they somehow think that stock valuations are in line with historical averages, which is way off base because stocks are way overvalued.

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