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Corporate Bonds - the calm before the storm?


Patrick Kelliher

With the falls in equity markets over the past week, there has been a modest uptick in corporate bond spreads with US investment grade spreads up ca.20bps to 120bps or so. However, these are still at the lower end of recent history, with US investment grade spreads frequently trading over 150bps in the last 10 years and reaching over 300bps in the aftermath of the Lehmans default. I think the markets are not properly pricing in the risks associated with Corporate Bonds, and there is a risk of a collapse of this market on a par with the aftermath of Lehmans.

Even before the onset of Covid-19, the IMF was warning of the risks posed by rising corporate burdens and potential issues with corporate bond illiquidity in its 2019 Global Financial Stability Report [1]. On the former, the IMF estimated that in a mild slowdown, about half as severe as that suffered during the Global Financial Crisis of 2007/09, debt owed by firms unable to service the interest could...

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