Is Corporate Debt the Next Asset Bubble?

  • 26 Nov 2012
  • By The Economist Intelligence Unit
  • Topics: Interest Rates

Investors Run Risk of Recession-Driven Write-Downs

Times are good for corporate treasurers at the world's biggest companies, what with their ability to raise money in the bond markets at the lowest costs in living memory, according to the Economist Intelligence Unit.

For the year through October, global corporate-bond issuance totaled $3.3 trillion, close to the record set in 2009. Illinois-based pharmaceutical company Abbott Laboratories, for example, earlier this month raised $14.7 billion, the biggest deal of the year, at maturities ranging from three to 30 years with yields as low as 1.2%. Meanwhile, smaller businesses are still finding it hard to get financing from banks.

However, the combination of investor enthusiasm, heavy issuance and very low yields "naturally creates the possibility that an asset bubble is being inflated," analysts with the Economist Intelligence Unit wrote in a recent report.

Investors face at least a few risks. "The first is that economies will dip back into recession and that more companies will default on their bond issues, forcing investors to suffer write-downs on their holdings," the group wrote. Conversely, the prospect economies rebound sharply could also cause problems.

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