Bond issuance tailed off in 2021 as companies boosted their cash ratios to healthy levels, and then declined sharply in 2022 as interest rates rose. Issuance volume popped substantially during the first two quarters of this year as companies returned to the bond market — though it is not quite back to its 2019 levels.
In addition, corporations have reportedly invested a sizeable portion of fixed rate borrowings during the extremely low-rate period after the pandemic in 2020–21 in variable rate deposits, benefiting from higher rates.
Normally when interest rates rise, so too do net debt payments, squeezing profit margins and slowing the economy. But not this time. Corporate net interest payments have instead collapsed.
Last but not least, with historically high levels of profit margin until early 2023, companies were able to absorb rising debt costs. Profit margins rose post-pandemic to record levels, with many companies able to pass higher costs to their customers through higher prices.
Combined with improved operating efficiencies, this dynamic led to record profits, followed by a dip in recent quarters. In a “higher-for-longer” interest rate world, many companies are drawing down cash buffers as earnings moderate and debt servicing costs rise.
The ability of individual and business borrowers to service their debt is shrinking. Large amounts of corporate debt is due for repayment in 2024.
The Global Financial Stability Report shows increasing shares of small and mid-sized companies in both advanced and emerging market economies with barely enough cash to pay their interest expenses. And defaults are on the rise in the leveraged loan market, where financially weaker companies borrow.
These troubles are probably going to worsen in the coming year as more than $5.5tn (£4.5tn) of corporate debt globally becomes due.
Rhyme versus reason
To maintain a kind of credibility, central banks have entered an anti-inflation priority rhetoric while an important component of inflation was linked to very specific Covid shocks and supply shocks.
When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks — at the risk of de-anchoring inflation expectations — or reacting to them to ensure that inflation expectations remain anchored. This is because economists and economic policymakers believe that households’ and companies’ expectations of future inflation are a key determinant of actual inflation.
Economists’ thinking on this question is deeply influenced by the high inflation rates of the 1970s. During that decade, workers started to ask for larger pay raises to cover the higher prices they expected over the following year. That led to more money circulating through the economy, encouraging businesses to increase their prices.
