The coronavirus economic panic has raised the risk that more corporations will default on their debts, already at record levels, especially in the junk bond market.
At the same time, the global economy is slowing and the credit market is tightening. That makes it more difficult for corporations to roll over debt. Also, as conditions worsen and corporate sales and profits shrink, more of those bonds will fall into the high-risk or “junk” category, where defaults are most likely.
As we have long noted, central banks’ policy of low interest rates and cheap money have enticed more and more businesses to borrow, including those who wouldn’t have received loans in a normal credit market.
Half of all corporate bonds now hold BBB status, two steps above junk, compared to less than 20 percent in 2001. A third of these companies are rated BBB-, one step away from junk.
The flight to 10-year U.S. Treasury notes last week also indicates that bond buyers have lost their taste for speculation and want a safe harbor.
