Global debt sales reached a record in 2016, led by companies gorging on cheap borrowing costs that are now threatened by Donald Trump’s pledge to fire up the US economy.
The bond rally that dominated the first half of the year helped entice borrowers that issued debt via banks to take on just over $6.6tn, according to data provider Dealogic, breaking the previous annual record set in 2006.
Companies accounted for more than half of the $6.62tn of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan, as well as a cautious Federal Reserve, encouraged the corporate world to increase its leverage.
Corporate bond sales climbed 8 per cent year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.
The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction.
While US government bond yields touched their low in July, the prospect of Mr Trump cutting taxes and injecting fiscal stimulus has accelerated a move higher in interest rates that some investors fear will make debt burdens harder to bear in 2017.
After touching a record low of 1.32 per cent in July, the yield on the 10-year US Treasury — an important benchmark for corporate borrowing costs — has surged more than a percentage point to 2.57 per cent.
“The low cost of financing with record-low interest rates simply made building up leverage tempting,” said Scott Mather, chief investment officer for core fixed income at Pimco. “This happens every economic cycle, but what makes this one special is the added incentive to issue debt at very low interest rates. It sows the seeds of the next downturn or the next credit event.”
Corporates “took advantage of low rates,” said Monica Erickson, portfolio manager with DoubleLine Capital. “The cost of capital is low so it makes sense for them to come to market.”
With the universe of negative-yielding bonds touching almost $14tn at one point, money managers were willing to stomach lower returns. The year’s debt sales were buoyed by China and Japan-based issuers, up 23 and 30 per cent respectively, from a year earlier.
Investors say they expect 2016 is likely to prove a high-water mark for debt issuance in this cycle, with the Fed forecast to raise rates further and question marks growing over the future of bond-buying programmes from the BoJ and the ECB.