Corporate Bond Growth : Placing today’s corporate bond growth in context

  • Financial bonds will experience 14 quarters of deleveraging; will return to growth in 2012
  • Nonfinancial bond growth will slow relative to Fed action-inspired increases of 2009
  • Overall, total bonds outstanding is holding up far better than during the Great Depression

Placing today’s corporate bond growth in context

During the Great Depression, the outstanding level of nominal corporate bonds collapsed by 12.7% from 1932 to 1938 despite deflationary pressures. Major triggers of this collapse were the Federal Reserve’s inaction and a massive contraction in industrial production alongside widespread bankruptcies; with such a reduction in economic activity, the need for bonds dwindled. Fast forwarding to today’s economic context, the Fed’s zero interest rate policy and liquidity support ensured that the contraction in corporate bonds outstanding was short-lived. Large companies rely on the bond market. Long-term bond financing also facilitates plant and equipment investment. By pulling on the lever of long-term interest rates, the Fed could jolt balance sheet repair in the corporate sector and push long-term investment. This was a major failing of policy action during the Great Depression. Although the decision to move forward with long-term investments is beset by unusually-high uncertainty, the corporate sector did considerably refinance its long-term debt.
As such, nonfinancial corporate bonds continue to grow, which keeps total credit growth in the US from falling off a cliff. With recovering industrial production and stabilizing corporate spreads, nonfinancial bond growth will remain positive. However, given expectations of higher yields in the future, nonfinancial bond growth will slow. With the Fed expecting to keep rates low for an extremely long period of time, this issue is not necessarily an immediate concern, but it does drive the long-term forecast. Cheap financing terms cannot last forever. In the early 1980s, the Volcker Fed’s assault on inflation through serious negative real interest rates brought real outstanding nonfinancial credit growth to a standstill. Nonfinancial bonds are just one of three major components of total outstanding corporate bond growth.
Bond Supply and Demand, In $bn , and Nominal Annual YoY Bonds Outstanding