The Strategist

Analysts: Rates falling, debt instruments going up

01/13/2020 - 11:04

Demand for debt instruments is growing at low rates: the global volume of bonds issued by all issuers is approaching $ 120 trillion, and this is a record high, experts at the Washington Institute of International Finance note.

Developing countries are in line with the general trend, their share in this market is at a maximum - about 25% of the total, while it was 10%before the crisis of 2008-2009. The US government and Japan have also significantly increased the volume of placements. The increase in demand was facilitated by the programs of central banks for the purchase of assets and an excess of savings amid an aging population. As a result, the volume of bonds with negative yield at the end of 2019 grew to $ 11.5 trillion (this is about 10% of the entire market). 

A decrease in economic activity may adversely affect the financial stability of global companies with high debt burdens, forcing them to attract even more loans. This, in turn, may lead to lower ratings by rating agencies, which will increase the cost of borrowing for high-risk borrowers. In China, last year, almost 5% of Chinese issuers defaulted on their debt obligations, whereas the figure was 0.6% five years ago.

The borrowed funds of the company, as a rule, were used not for updating fixed assets or developing technologies, but for repurchasing own shares from the market (buyback). In 2020, the volume of such operations may exceed $ 1 trillion.