The debt pile sitting under global corporates has swelled to record levels in the past year despite interest rate hikes beginning to cool firms’ appetite for borrowing, new research has revealed.
Companies around the world took on some $456bn of net new debt in the financial year to March, pushing the outstanding total pile to a record $7.8 trillion (£6.03tn), according to the latest annual Janus Henderson Corporate Debt Index.
Borrowing surged 6.8 per cent on the previous year and topped the previous 2020 peak after adjusting for swings in exchange rates. However, Janus Henderson’s fixed income portfolio managers James Briggs and Michael Keough said the spike in debt did not signal looming instability in the financial system.
“Debt levels may have risen but they are very well supported, and the global economy has remained remarkably resilient,” they said.
“This resilience and the extraordinarily high levels of profitability companies have enjoyed in the last two years reflect vast sums of government deficit spending and central bank liquidity stimulus during the pandemic.”
Rate hikes by central bankers over the past year to tame inflation are now cooling the appetite for more debt however and would affect the “structure of their borrowings”, the pair added.
Some 20 per cent of the net-debt rise this year also reflected firms like Alphabet and Meta wittling away at their vast cash mountains.
City analysts are pricing in that rates will top six per cent in the UK as the Bank of England moves aggressively to tame stubborn inflation. The rapid hikes from Threadneedle Street have sent bond yields rocketing and made them a tempting prospect for money managers.
Janus Henderson said the environment could mean “exciting time” for global bond investors.
“Higher interest rates mean ‘income’ is back as a theme,” Janus Henderson added.
“Investors can now lock into meaningful levels of income for the first time in years. Not only that, but when market interest rates fall to reflect lower inflation and a slowing economy, bond prices rise, generating capital gains too. Central banks are likely to start cutting rates in 2024.”