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Alternative Market Briefing

Global corporate debt with negative yields swells to $19tn

Friday, October 18, 2019

Laxman Pai, Opalesque Asia:

As investors search for richer returns in riskier assets after recent interest rate cuts by central banks, the corporate debt market has been swelling.

Low-interest rates are encouraging companies to take on a level of debt that risks becoming a $19 trillion timebomb in the event of another global recession, the International Monetary Fund (IMF) warned.

The United Nations specialized agency in its Global Financial Stability Report (GFSR) raised serious concern about the buildup of financial vulnerabilities in the corporate and non-bank financial sectors in several large economies amid loose monetary policies around the globe.

Investors have interpreted the central bank actions as a turning point in the monetary policy cycle. The shift has been accompanied by a sharp decline in long-term yields. In some major economies, interest rates are deeply negative.

Remarkably, the amount of government and corporate bonds with negative yields has increased to about $15 trillion. Moreover, markets expect about one-fifth of government bonds will have negative yields for at least three years.

Besides, corporations are taking on more debt, and their ability to service that debt is weakening. In the event of a material economic slowdown, the prospects would be sobering.

Debt owed by firms unable to cover interest expenses with earnings, which we refer to as corporate debt at risk, could rise to $19 trillion in a scenario that is just half ......................

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