The International Monetary Fund (IMF) revised down the global economy from 2.9 percent to minus 4.9 percent in this year - Photo by OECD

JAKARTA (TheInsiderStories)Global corporate bonds are predicted will reached US$4 trilion until 2022, amid the obligation of non-financial companies to refinance of their loans. This is close to the total balance sheet of the United States (US) Federal Reserve, OECD told in its latest report.

In the report, unit of the World Bank Group stated, since the financial crisis in 2008 non-financial companies have dramatically increased their borrowing in the form of corporate bonds. Between 2008-2018 global corporate bond issuance averaged $1.7 trillion per year, compared to an annual average of $864 billion during the years leading up to the financial crisis.

As a result, the global outstanding debt in the form of corporate bonds issued by non-financial companies reached almost US$ 13 trillion at the end of 2018. This is twice the amount in real terms that was outstanding in 2008,” said OECD.

America remains the largest market for corporate bonds. But non-financial companies from most other economies, including Japan, the United Kingdom, France and Korea, have all increased their use of corporate bonds as a means of borrowing.

On a global scale, the most significant shift has been the rapid growth of the Chinese corporate bond market. The People’s Republic of China has moved from a negligible level of issuance prior to the 2008 crisis to a record issuance amount of $590 billion in 2016, ranking second highest in the world.

The increased use of corporate bonds has been supported by regulatory initiatives in many economies aiming at stimulating the use of corporate bonds as a viable source of long term funding for non-financial companies and an attractive asset class for investors.

The increase in bond usage is also consistent with the objectives of expansionary monetary policy and the related unconventional measures by major central banks in the form of quantitative easing.

Given the elevated risks and vulnerabilities associated with the current outstanding stock of corporate bonds that is documented in this paper, it is therefore important to understand how and to what extent today’s corporate bond markets may be influenced by different economic and public policy scenarios.

First, there are concerns about global economic growth. And in the case of a downturn, highly leveraged companies would face difficulties in servicing their debt, which in turn, through lower investment and higher default rates may amplify the effects of a downturn.

Second, while major central banks recently have modified the use of extraordinary measures, the future direction of monetary policy will continue to affect the dynamics on corporate bond markets. Last but not least, gross borrowings by governments from the bond markets are set to reach a new record level in 2019.

Beside that, the significant increase in corporate bond issuance and the resulting record levels of outstanding debt may be interpreted as an indicator of increased risk-taking by investors that are searching for yield in a low interest rate environment.

However, such conclusions between increased issuance and investor risk appetite may be incomplete without also examining the evolution of issuer quality. 

Indeed, recent research shows that a significant decline in corporate bond issuer quality is a better signal of excessive risk-taking in credit markets than a rapid increase in debt issuance.

A recurring pattern of credit cycles appears to be that a deteriorating level of issuer quality is followed by lower investor returns due to the subsequent default of low-quality issuers and widening of credit spreads

Moreover, global net issuance of corporate bonds in 2018 decreased by 41 percent compared to 2017, reaching its lowest volume since 2008. Importantly, net issuance of non-investment grade bonds turned negative in 2018 indicating a reduced risk appetite among investors. The only other year that this happened over the last two decades was in 2008.

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