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Private Debt Balloons, Bond Market Blindness?
23 Jan
Summary
- US companies issued $2 trillion in public debt yearly.
- Private debt now exceeds comparable public debt.
- Bond market's early warning system is weakening.
US companies have engaged in a significant borrowing spree, issuing approximately $2 trillion in public debt annually over the past two years. Despite this surge and increased interest rates, credit spreads remain at historical lows, suggesting market confidence in companies' ability to repay. However, this optimism may be misplaced as a substantial portion of this borrowing is for speculative ventures like AI investments.
More concerning is the rapid growth of private debt, which is accumulating away from the bond market's scrutiny. The annual change in outstanding US private debt has surpassed $100 billion between 2019 and 2023, with new private lending exceeding $200 billion annually in recent years. This private debt is increasingly comparable to 'B'-rated public debt, which Moody's identifies as speculative and high-risk.
The bond market's traditional early warning system, indicated by rising credit spreads, has historically correlated with bond ratings and potential defaults. While public debt spreads have reflected this correlation, private debt's opacity means similar warning signals are absent. This lack of transparency poses a risk, as private credit defaults could impact not only investors but also the broader economy.
