If debt lights the fire of every financial crisis, as author Andrew Ross Sorkin once observed, then we may have a problem brewing. Companies have loaded up on a record amount of debt in recent years, thanks in part to rock-bottom interest rates. Most market watchers don’t expect the buildup to trigger an imminent credit disaster. Still, investors should be aware of risks that are building and choose carefully as they invest in bonds or stocks. // Years of low interest rates have fueled a decade-long economic expansion and a bull market in stocks and bonds, and such ideal economic and market conditions have been perfect for borrowing. The value of outstanding IOUs issued to investors and other institutions by large, nonfinancial U.S. companies—$10 trillion, reports the St. Louis Federal Reserve— has nearly doubled over the past decade. That’s equivalent to half the country’s gross domestic product.
Many firms have used the borrowed money to fund acquisitions. For example, CVS Health borrowed $45 billion to acquire Aetna in 2018. Others have issued debt to fund share buybacks— including Apple, which launched a massive bond offering in 2013. Still others have borrowed to make or bolster dividend payments.
But there’s a fine line between smart borrowing and overextension, and some market watchers see worrisome signs. The quality of the debt is one issue. Half of all high-quality corporate debt is rated triple-B, the lowest rung of investment-grade credit. When triple-B-rated companies slip up, they risk a rating downgrade to “junk” status, which can stoke investor fears and send the bond market reeling.
This story is from the March 2020 edition of Kiplinger's Personal Finance.
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This story is from the March 2020 edition of Kiplinger's Personal Finance.
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