The Strategist

McKinsey Global Institute: Risks in bond markets are growing

06/26/2018 - 16:12

In 2007-2017, the world market of corporate borrowings grew almost threefold, to $ 11.7 trillion. The share of bonds in its structure was 19%, analysts of the McKinsey Global Institute (MGI) state. The intensive growth of bonded debt was observed in all regions, but almost two-thirds of it was provided by developing countries.

Rafael Matsunaga
Rafael Matsunaga
The main reason for the market growth was the post-crisis restructuring of bank balances, which forced non-financial companies to look for new sources of investment. The rapid development of the corporate bond market, however, caused a significant decrease in the average quality of borrowers. According to MGI analysts, more than half of the outstanding debt of non-financial companies in the US accounts for issuers with an increased risk of default (mainly from retail and energy sector). A similar situation is observed in developing countries, primarily in India, Brazil and China, where the share of such companies reaches 30%. At the same time, the share of "junk" bonds is now less than 5% in most European countries as only "blue chips" go to this market in the conditions of a cheap loan.

Analysts at McKinsey note the risk of deterioration in the financial position of some issuers in developing countries in the face of the expected tightening of credit conditions. According to their calculations, an increase in interest rates by 200 basis points could lead to a growth in the share of issuers with an increased risk of default to 40%. The most vulnerable industrial companies and issuers are located in the real estate sector, accounting for more than half of the outstanding debt in China and Brazil. Recall, earlier the US Federal Reserve raised the key rate to 1.75-2%, and the ECB announced completion of the quantitative easing program. However, it is too early to talk about a bubble in the world bond market, the authors of the MGI report believe, despite the risks of investing in "junk" bonds, the degree of negative impact of defaults on financial markets will be insignificant.