BBB Corporate Bonds – How Many Are Close to Default?
In 2008, in the aftermath of the financial crisis, the Federal Reserve began its “quantitative easing” program, a determined effort to lift the economy by lowering the cost of borrowing. It bought up trillions of dollars in Treasury and other debt securities, effectively reducing long-term interest rates. Debt issuance exploded. In the last decade, the amount of corporate bonds outstanding almost doubled to $9 trillion, from $5.5 trillion.
Much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum — meaning that the money borrowed remains at some danger of not being paid back. There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, almost three times the amount that existed in 2008 and making up an ever increasing portion of the investment grade bond market at almost half of its overall size bond market.
The changing composition of the bond universe introduces extra risks for investors tracking the broad market. Lower-rated bonds tend to fall more sharply if sentiment deteriorates, and are more likely to default or be downgraded to junk, which can prompt some forced selling.
General Electric Co. (GE) is an example of a high-profile company with a lower investment-grade rating that has struggled. Yields on GE bonds due in 2025 have moved to 6.4% from below 3%. What happens in the corporate bond market has wider implications, since rising credit spreads can feed through to the rest of the economy.