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Investment grade companies have increased the amount of debt they carry to the highest level since the aftermath of the financial crisis, as companies take advantage of low interest rates to finance mergers and shareholder payouts.
“Debt levels have increased faster than cash flow for six straight quarters, boosting the obligations of investment-grade companies in the second quarter to 2.09 times earnings before interest, taxes, depreciation and amortization.” According to data from JPMorgan Chase & Co.
This leaves many companies in a precarious position should the economy not recover as expected.
Rajeev Sharma of First Investors Management told Bloomberg.
“They are stretching their metrics and leaving themselves exposed to the risk that there isn’t a full-scale recovery.”
While heavier debt burdens are fine when interest rates are at record lows, they can be a noose around a companies neck once rates start to rise. That debt has to be paid back or refinanced at some point and with the Fed looking likely to scale back the level of bond purchases it makes, possibly as soon as next month, the days of cheap debt may be numbered.
Todays Other Top Stories
Abnormal Returns: – Words have consequences: bond edition. – Tadas Viskanta on the need to be a more savvy consumer of financial media.
Benzinga: – Nifty new bond ETF has low duration, high yield. – These are trying times for bond bulls. Even when accounting for Tuesday’s nearly three percent slide, 10-year Treasury yields have surged 28.4 percent in the past 90 days. That means tens of billions in destroyed capital in bonds and scores of bond funds. Some investors are not waiting around for the carnage to get any worse.
Learn Bonds: The Fed is not responsible for maintaining or increasing the value of your assets! – Yes, it is true that it can be prudent not to bet against the Fed. However, the operative word here is “bet.” Bet equals speculation. Speculation means that you are hoping to buy low and sell high or short-sell high and cover buy low. Anyone who invests in an asset or assets with values being boosted by Fed policies and convinces themselves that Fed policy will always come to their rescue deserves what they get when the Fed acts for the greater good of the economy and financial system in a manner which is not beneficial for your investments.
FT: – Low corporate debt sales just a summer lull. – The US Federal Reserve has sent a shudder through the global corporate bond market. As yields on US Treasuries have risen ahead of a planned slowdown in Fed asset purchases, or “quantitative easing”, companies’ debt issuance has recently slowed significantly.
MarketWatch: – Bond bear could maul global markets. – With the phase out of the Federal Reserve’s quantitative-easing program looming on the horizon, the bond market is getting nervous.
FT Adviser: – Focus on bonds. – The Federal Reserve’s proposal to moderate its quantitative easing programme has created volatility in the bond markets.
ETF Trends: – Active junk bond ETF sports 8% yield. – An actively managed high-yield, speculative grade bond exchange traded fund has held up remarkably well as interest rates rise. Bond investors should keep in mind that in a rising interest rate environment, various fixed-income assets will react differently.
Yahoo Finance: – Bond traders smell blood, and it could be their own. – The bond traders are trying to wrest control of bond rates from the Fed. No way the Fed wants a ten-year approaching 3% now or anytime soon, because of its deleterious effects on mortgage rates and thus the housing recovery that is providing sustenance to the slow but steady recovery.
FT: – ‘Sudden death’ bank bonds on the increase. – Some call them “sudden death bonds”; others talk about “wipeout” bonds. Both refer to the potential of some cocos, or contingent convertible bonds issued by banks, to turn debt investors’ gold into lead. Either way, European banks are issuing them in growing numbers despite mounting criticism that they discriminate against investors.
Income Investing: – California gets favorable rates for $764M muni sale. – Amid the latest round of dour municipal bond headlines (I’m looking at you, Detroit and Puerto Rico) it’s nice to see business carrying on as usual in certain areas of the muni market. Or better than usual, in the case of California, which yesterday sold $764 million of new bonds at rates lower than previously expected, as investors have warmed to the state’s improved financial outlook. For now, anyway.
PIMCO: – Seeking returns in an evolving market of bonds. – PIMCO’s Douglas Hodge talks about why demand for bonds will rebound.
Digital Journal: – Investment grade credit, high yield debt, emerging markets debt appear attractive. – Investment grade credit, high yield debt and emerging markets debt appear attractive to fixed income investors, according to a recent report from Standish, the Boston-based fixed income specialist for BNY Mellon.
Reuters: – New York cuts rates for municipalities’ contributions to pension system. – New York state has lowered the amount it requires public employers to pay into the pension system as cash-strapped municipalities struggle with retirement costs that sky-rocketed after the financial crisis wiped out pension fund assets.
FT Adviser: – Shop around for bond alternatives. – Investec Bank’s Harris Gorre says bond investors should shop around like mortgage buyers as the end of QE looms.
— Cate Long (@cate_long) August 28, 2013
5yr Trsy auction demand soft after strong 2-yr sale yesterday. Bid/cover below avg, dealer take above avg but direct bidders improve.
— AnthonyValeri (@Anthony_Valeri) August 28, 2013