Graphic Content – January; underlying fragility of the US corporate sector

Mike Riddell
Written by

17th January 2018

As we’ve mentioned in recent months, total risk premia on US corporate bonds is at its lowest level ever. Meanwhile, the debt that US corporates have loaded onto their balance sheets has steadily climbed to the point where leverage is now at an all-time high. While the credit to GDP calculation uses market value (recently supported by tighter credit spreads and lower bond yields) rather than book value, the US corporate sector still remains in a highly leveraged position relative to the spreads which their bonds are offering.

As long as US Treasury yields remain low and credit spreads remain tight, debt can continue to be serviced. Record high levels of leverage, however, suggest an underlying fragility to the corporate credit sector should debt service costs begin to pick up on the back of higher US Treasury yields and/or wider credit spreads.

US Corporate Spreads versus Leverage

Source: Allianz Global Investors, Bank for International Settlements, Barclays Capital, Bloomberg, (31/03/1987-29/12/2017). Past performance is not a reliable indicator of future results.

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance is not a reliable indicator of future results. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

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