Corporations are piling on the debt.

Last week, companies borrowed $74 billion in the US investment-grade bond market. It was the largest corporate debt increase for any comparable period since they started tracking such things in 1972.

According to Bloomberg, there is no sign the borrowing binge will let up. Analysts expect corporations to borrow another $50 billion through the rest of the month.

Borrowing activity is also spilling over into junk bonds and leveraged loans as well. There was a $16 billion increase in the US leveraged loan market last week. “Leveraged loans” are made to firms already deeply in debt. Think subprime loans for corporations. As with any risky loan, they could be difficult to either collect or resell in a downturn, putting both the borrower and lender at risk.

Investment-grade debt outstanding totaled $5.8 trillion as of Sept. 4, more than double the level a decade ago.

This isn’t just an American phenomenon. Global corporate borrowing also set a record of $140 billion last week.

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Low bond yields are helping drive the borrowing spree. Negative-yielding debt topped $15 trillion globally for the first time ever last month and it has since climbed to over $16 trillion. This pile of negatively yielding paper includes government and corporate bonds, along with some euro junk bonds. WolfStreet called it a “race to hell.” As the Financial Times put it, negative bond yields were once considered to be “economic lunacy.” Now they are economic normalcy.

Central banks are fueling the borrowing fire, and the world is about to experience another round of monetary easing. Most analysts expect the ECB to push rates lower during its September meeting and possibly restart quantitative easing. Next week, the Federal Reserve is widely expected to nudge rates down another 25 basis points.

The Fed issued a warning about rising corporate debt last spring.

“Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid signs of deteriorating credit standards.”

According to the Fed, the growth in business debt has outpaced GDP growth for the last decade.

“Although debt-financing costs are low, the elevated level of debt could leave the business sector vulnerable to a downturn in economic activity or a tightening in financial conditions.”





Chris Dlugosz, Flickr

Note that “tightening financial conditions” means rising interest rates. This explains exactly why the Federal Reserve abandoned any pretense of interest rate normalization and why Donald Trump keeps badgering Powell and Company for even lower rates. Economies built on debt don’t do well when interest rates rise.

SEC Chairman Jay Clayton issued a warning about corporate debt this week. During a speech, he noted that outstanding corporate debt in the US stands at almost $10 trillion. That’s nearly 50% of GDP.

“Those are numbers that should attract our attention.”

Corporate debt isn’t the only problem. American consumers are propping up the US economy with money they don’t have.

Total outstanding consumer debt surged over $4.1 trillion in the second quarter of 2019. Over the last 12 months alone, American consumers have piled on an additional $208 billion of debt.

Revolving credit – primarily credit card debt – increased at an annual rate of 5.3% in Q2. Americans currently owe $1.07 trillion on their plastic. This was a record for a second quarter and was only topped by the “holiday shop-and-borrow” season in Q4 2018.

The mainstream continues to shrug its shoulders and look the other way when it comes to the rising sea of global debt. But as we’ve said over and over again, depending on borrowing to drive your economy isn’t a sustainable strategy. At some point, the debt has to be repaid. And the central planners can’t keep interest rates at zero forever. Economies need savings and capital investment for real long-term growth. This debt bubble will pop. And when it does, it’s going to get ugly.

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