Trillion debt bomb is ticking: never have there been so many junk bonds of companies

never in the company were indebted in the world so bonds, as is currently the case. The volume of corporate bonds outside the financial sector had increased to

Trillion debt bomb is ticking: never have there been so many junk bonds of companies

never in the company were indebted in the world so bonds, as is currently the case. The volume of corporate bonds outside the financial sector had increased to 13.5 trillion (12.5 trillion euros) to a new record, the Reuters news Agency reported in mid-February, citing a study by the organization for development and economic cooperation, short of the OECD.

according to The study, this would seem the result of a never-seen-before issue of new debt since the financial crisis of 2008, with usually of lower quality than similar, earlier developments. "Compared with previous cycles, the current stock of outstanding corporate bonds with a lower overall credit quality, higher repayment obligations, longer run times and the worse of the Treaty protection" - quoted Reuters the study.

Due to the return of some of the Central Bank to a more expansionary monetary policy in 2019 would have raised as much capital as never before about bonds, it said further. The OECD decision-makers in the monetary policy, to take account of the size and quality of the market for corporate bonds in their actions admonished for it.

proportion of junk bonds increases noticeably

in Addition, the OECD warned of the consequences of the development in a recession: "These characteristics can amplify the negative effects of a cyclical downturn in the non-financial corporate sector and the economy as a whole."

In each year since 2010, according to the study, the proportion of Corporate Bonds outside of the so-called Investment Grade, with a fifth located. As an Investment-Grade credit rating are referred to levels above the Ratings BBB- (Fitch and Standard & Poor's) or Baa3 (Moody's). Although there are also gradations in the credit rating, these facilities are considered to be comparatively safe. Germany, for example, has all three rating agencies, the best rating of AAA. Government bonds are therefore considered to be virtually fail-safe. With Stock Selection in Europe, you will achieve excess Returns with System! (Partner offer) Now 30 days free of charge test!

Everything below BBB - and Baa3, however, is considered junk, in English it is often spoken of Junk Bonds, "junk bonds",. In most cases, companies are defined here as bonds. The failure of a bond is here a much more real risk, even if the coupons – the offered rate of interest, as a rule, bond is several percentage points above safe state.

in 2019, the share of corporate bonds to junk level had risen further to 25 percent, according to the OECD. Since 1980, there was no so long period of time, in so many scrap-noted bonds. In addition to this, it managed in the past three years, only half of all newly issued Bonds to BBB, the lowest Investment-Grade Rating.

the OECD expects higher default rates

With the share of junk Bonds, the risk grows that the market for business loans. According to the OECD, the development suggests that the failure rates will be during a downturn in the future expected to be higher than in previous credit cycles.

"Without the support of low interest rates or an economic downturn in the same Rating mechanism that allows for a Leverage of the debt will lead to gradations, the financing costs of the company increase and the possibility of Investments to reduce," says the OECD.

Also retail investors and savers are affected

The consequences of such a development, then, of course, the investors, when the bonds need to be sold to a Gradation with a loss. For many institutional investors, Bonds, investments outside the Investment-Grade off-limits. However, given that many corporate bonds are currently at the threshold to the junk area, could gradations lead to a sale.

Indirectly, investors and savers are also private affected. Because not a few investors, such as capital, life insurers, foundations and pension insurance are forced to buy the risky, but profitable corporate bonds, since they need to have income and at the same time, many government bonds burn now money. The current yield on ten-year Confederation bonds dropped to minus 0.7 per cent – buyers lose, so at the current prices on the secondary market per year to 0.7 per cent by the end of the term. Small Caps Champion: your 3 pillars for a successful wealth accumulation. Successfully and safely in addition to values invest. (Partner quote) Here is an exclusive free trial!

"Harmful side effects of the low interest rate policy will be clear"

In corporate bonds is hardly an investor is coming, so, whether directly or indirectly. Experts are alarmed because of the growing mountain of corporate and government bonds. "The harmful side effects of the prolonged low-interest-rate policy of the Central banks are becoming increasingly clear," said Thomas Mayer, the "world". The Economist was the chief economist at Deutsche Bank, and currently directs the Research Institute of the asset Manager Flossbach von Storch.

Through the bonds emissions are higher than ever in debt, a deteriorating quality of the loans, said Mayer. Just for the buyer is often recommended ETF Mayer has bad fears: "you could be surprised by a sudden loss of quality and the illiquidity of their investment."

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Date Of Update: 07 March 2020, 22:00

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