“Struggling companies that otherwise might not be able to stay afloat have found a friend in the Federal Reserve.
The central bank’s cheap-money policies have allowed borderline companies to get low-cost financing thanks to investors who are thirsting for yield and buying risky bonds as the Fed keeps its target funds rate near zero.
While that’s been a boon for poorly rated firms, it also poses the threat that companies that otherwise might fail are getting artificial support and in danger of causing substantial economic damage once interest rates rise.
“We’re paying the price for a dysfunctional system,” said Cornelius Hurley, director of the Boston University Center for Finance, Law and Policy. “Fiscal policy is dead in the water because of the political stalemate in Washington, and as a result the Fed in its monetary policy role has to overcompensate.”
While corporate cash gets cited often as one of the strongest positives for economic potential, corporate debt is swelling as well.
Nonfinancial companies added debt at an 8.75 percent pace in the fourth quarter, the biggest jump since 2007, with the majority of debt coming from corporate bonds, according to Fed flow of funds data.
Much of that has come from companies rated below investment grade.
High-yield debt soared to $326 billion in 2012 from $226.3 billion the previous year, according to Thomson Reuters.
In 2013, junk bond volume in the U.S. is at $69.2 billion compared to $78.3 billion for the same period in 2012 – off last-year’s record pace but still well ahead of any previous year and more than double what it was at the pre-financial crisis high in 2007.
Globally, high-yield bond issuance stands at a historic mark of $108.5 billion, buoyed by central banks around the world mimicking Fed policy and cutting rates at breakneck pace.
Spreads between junk bond yields and their benchmark measuring sticks are at the lowest since 2007…..”
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