Corporate debt, or money borrowed by corporations from investors in the form of bonds, has been increasing since the Great Recession. Due to abnormally low interest rates, corporations have been issuing debt at record numbers because of the lower cost of borrowing. Half of today’s $3.7 trillion of corporate debt is BBB rated. This is considered to be in the investment-grade or high quality range, but sits just above the territory of junk bonds, which have a higher risk of companies defaulting. The concern is that in an economic downturn, BBB rated bonds could be downgraded by ratings agencies like Moody’s and S&P, putting it in junk bond range. With a large percentage of corporate debt potentially moving to riskier territory, prices would fall, and investors could see a loss in its bond’s re-rating. While not as bad as companies defaulting on the bonds, the volatility could transfer to other financial markets such as equities. We don’t believe that this will be the case over the coming year but are aware of the potential risks and are focused on monitoring the overall fixed income market.
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