Global Debt Sales Hit A Record $6.6 Trillion In 2016

Tyler Durden's picture

Earlier in 2016, the US Investment Grade bond market passed an key milestone when some time around August, the total amount of high grade debt outstanding hit $6 trillion, tripling from $2 trillion at the time of the financial crisis. Most, if not all, of the new funding was used to buyback stock.

And now, as we come to the end of 2016, another $6 trillion number makes a dramatic appearance, this time in a slightly different metric: according to Dealogic, global debt sales hit a record in 2016, led by corporations rushing to load up on cheap borrowing costs, now threatened by Trump’s vague policies to boost the US economy. As the FT reported, courtesy of record low rates throughout most of 2016, overall debt issuance in the year rose to just over $6.6 trillion, breaking the previous annual record set in 2006.

Corporates “took advantage of low rates,” said Monica Erickson, portfolio manager with DoubleLine Capital. “The cost of capital is low so it makes sense for them to come to market.”

Companies accounted for more than half of the $6.62 trillion of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan encouraged the corporate world to increase its leverage. The problem: rates are now rising rapidly.

Corporate bond sales - both investment grade and junk - climbed 8% year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.

The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction.

However, the annual bond issuance record may remain untouched for a while: the recent Trumpflation rally has accelerated the move higher in interest rates that some investors fear will make debt burdens harder to bear in 2017. It will certainly make new issuance more expensive for corporate Treasurers and CFOs.

Cited by the FT, Pimco's Scott Mather said that “the low cost of financing with record-low interest rates simply made building up leverage tempting. This happens every economic cycle, but what makes this one special is the added incentive to issue debt at very low interest rates. It sows the seeds of the next downturn or the next credit event.”

As the following chart shows, eight of the 10 largest bond sales underwritten by banks this year were from companies, including offerings from brewer Anheuser-Busch InBev, PC manufacturer Dell and Microsoft.

To be sure, 2016 was a "special" year with the universe of negative-yielding bonds touching $14tn at one point, forcing asset managers to "stomach lower returns."

It wasn't just corporations, however, rushing to load up on debt: the year’s debt sales were buoyed by China and Japan-based issuers, up 23 and 30 per cent respectively, from a year earlier.

Investors say they expect 2016 is likely to prove a high-water mark for debt issuance in this cycle, with the Fed forecast to raise rates further and question marks growing over the future of bond-buying programs from the BoJ and the ECB.

For a world drowning in debt, where by some estimates total debt/GDP is now around 225% (after clocking in at 199% in Q2 2014 per "that" McKinsey study)...

... any slowdown in debt issuance, or any roadblocks to the rolling over of tens of trillions in short-term debt, could prove calamitous. which is also why many market watchers are convinced that after a spike in yields in the next few months, fears of the next recession will sent yields to even lower, all time lows.

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NoDebt's picture

"Most, if not all, of the new funding was used to buyback stock."

When this finally comes crashing down it's going to hurt so bad our grandchildren are still going to be saying "ouch".  I'm pretty sure I mean that literally.

The Jenga tower is getting awfully tall and wobbly looking.  But first we have Dow 20,000 to hit.

NugginFuts's picture

which comes first: we hit Dow 20k or Dow 20k hits us?

peddling-fiction's picture

Interest on debt goes up. Splat.

I am Jobe's picture

The most recent ws Dell busying EMC with 69B. I wonder how many poor saps at Dell know what is awaiting  them. 

rccalhoun's picture

so NIRP is utopia.  unlimited debt and the owner of the debt pays the issuer a fee. dow 100K

Paul Kersey's picture

The US, alone, has $628 trillion (notional) in outstanding derivatives contracts as of 12/16, and don't be fooled by the financiers who tell us that they will all cancel out when TSHTF. Going back to what happened during the Lehman Bros derivative implosion, about 14% of those contracts might just be real money.

A. Boaty's picture

Don't worry. They have it all perfectly hedged.

Hohum's picture

Dr. Krugman, can global debt rise faster than global GDP forever?

Osmium's picture

I'm pretty sure it can, until it can't....

LawsofPhysics's picture

Yes. It already has and can continue ONLY so long as you accept the currency all that debt is priced in in exchange for the products of your labor...

Same as it ever was!!!

ejmoosa's picture

More importantly, can it rise faster than the profits that will be used to pay that debt back?  Because you cannot pay off debt with additional sales(GDP) unless those sales contain a whole lot of profit.

wisehiney's picture

Be right and sit tight.

Get paid to wait.

Lady Jessica's picture

As a claim on future income, what it the effect of this debt bubble on the economy going forward?

Jason T's picture

remember that scene in dumb and dumber?  ... 

Silver Savior's picture

*yawn* Good thing it's just debt that appeared one day from nothing. It's not like it's gold or silver.T he dollar is on its way to collapse anyway then there will be a debt jubilee. Loan more!

wisehiney's picture

The dollar is their Primary Tool.

It ain't going nowhere.

Until the last second.

Firestorme's picture

I have worked hard and have sacrificed to get my cash flow positive company debt free, pay off my mortgage and have no personal debt. My worry is for my kids and grand kids. How long can we/they continue to kick this can down the road by printing money and/or going further into debt?

This is like a snowball that is heading down a hill towards a house, getting bigger as it gets closer to the house. Instead of letting the snowball hit the house and then repairing the house afterward, it was diverted away from the house which lets it get larger as it is continues to roll down a hill. When it heads towards a small town where it would do more significant damage, it was again diverted away from the town where it continues to pick up speed and grows gigantic. Now it is heading towards a city and is too big to divert and the damage it will inflict upon the city is immense. I think that we are that city and nothing short of a nuke can stop the snowball from destroying our civilization. Question is what does that nuke look like and what will the ramification of the fallout be.

LawsofPhysics's picture

It will look just like it did in 2008/2009, such good behavior will be punished as you and I will be forced to bail out all those fuckers!!!

It is that or Global Weimar, no other options now (aside from a mass extinction of unfunded liabilities (world war).

Dragon HAwk's picture

Bunch of  Broke Drug Addicts writing each other  IOU's,  yeah that will work.

Silver Savior's picture

That's what the fed does already!

youngman's picture

This is why Gold should be $5,000 an ounce today and silver $100 plus....all this new paper money floating around.....and float it is....but who is buying all this crap...that is another perplexing question I want answered....

debtor of last resort's picture

Gold is at 15k already. You just can't see it.

Silver Savior's picture

Oh I see it clear as day. Precious metals are even too good for fiat currency. But I do still like looking for star notes and selling those off for more than a dolla..

Silver Savior's picture

I am actually waiting on $1000 silver and 20k gold. There is a lot of paper to back up. Not sure if I would sell any metal though. Might just wait for even better returns.

cashtoash's picture

debt is not money. just like in 2006, people, corporations, govt will simply default on debts and debt [money] will just evaporate, nobody will have money to buy gold [even at $200, 

sdsurf's picture

Giddy up Gold ! 

Batman11's picture

Neo-liberalism, and its underlying neoclassical economics, rely on debt to paper over the cracks, when debt. maxes out it stops working.

A system that re-cycles the surplus can carry on working indefinitely.

With Thatcher and Reagan we bought in a new type of capitalism and changed most of the fundamental assumptions.

Francis Fukuyama in 1992 said it was “the end of history” and Capitalism had been the only successful economic system to stand the test of time.

But we had just changed the fundamental assumptions about capitalism.

1) 40 years ago, most economists and almost everyone else believed the economy was demand driven and the system naturally trickled up.

2) Now most economists and almost everyone else believes the economy is supply driven and the system naturally trickles down.

These assumptions are the total opposite of each other.

When we believed the economy was demand driven and trickled up, we used strong progressive taxation to compensate for the inherent trickle up of capitalism. Inequality reached its lowest levels in recorded history in the developed world; there were no demand side problems.

Now we believe the economy is supply driven and trickles down, we lowered taxes on the wealthy and inequality soared; the demand side problems grow worse as the sticking plaster solution of debt. maxes out for individual consumers.

When we believed the economy was demand driven and trickled up, we thought fiscal stimulus was the answer to get the economy going again as it created jobs and wages to be spent into the economy and trickle up. We are just getting back to this way of thinking.

Now we believe the economy is supply driven and trickles down, we thought monetary stimulus was the answer to get the economy going again as the money given to the banks would trickle down to everyone else. After eight years we are just starting to realise this didn’t work and are heading back to fiscal stimulus based on assumption one.

1) 40 years ago, most economists and almost everyone else believed income was just as important as profit. Income looked after the demand side of the equation and profit the supply side. 

2) Now most economists and almost everyone else believes maximising profit is the only thing that matters.

The IMF, Larry Summers and others are commenting on the chronic lack of demand in the system, it looks as though assumption one was right all along. We had been relying on the sticking plaster solution of debt to keep assumption two working but this maxes out.

1) 40 years ago, most economists and almost everyone else believed Capitalism tends to polarise and you need to recycle the surplus

2) Now most economists and almost everyone else believes capitalism naturally reaches stable equilibriums

Wealth is polarising at an alarming rate and demand is suffering.

2016 – “Richest 62 people as wealthy as half of world’s population”

Keynesian capitalism used strong progressive taxation to compensate for the inherent trickle up of capitalism.The sticking plaster solution of debt maxes out, recycling the surplus can keep the whole thing going forever.

When Keynes was involved in putting together the new international order after the Second World War, mechanisms to recycle the surplus were put in place in the Bretton-Woods agreement. When the Euro was designed we assumed the Euro area would naturally reach a stable equilibrium and there are no mechanisms to recycle the surplus. The Euro-zone is polarising and the poorest nation, Greece, has collapsed under its debts and the other Club-Med nations are heading that way.

The sticking plaster solution of debt maxes out, recycling the surplus can keep the whole thing going forever.

Neo-liberalism was rolled out across the world, only debt has kept it running and the world is now maxed. out.

Batman11's picture

Michael Hudson’s “Super Imperialism” shows the ways the global economy has worked since World War Two with the US at its centre, initially with the US as a creditor nation and then, from the 1970s, as a debtor nation.

The mechanisms for recycling the surplus and later the deficit are covered.

With the US as debtor, China buys US treasuries allowing the US to take on more and more debt to buy Chinese stuff, it keeps the system working. This system is global and keeps the whole thing running using US treasuries.

There are no such recycling mechanisms within the Euro-zone, probably why it is polarising and collapsing.

We know these recycling mechanisms have to exist at a global level, why are they missing from the Euro area?

You would have to ask the clowns that designed it.   

GRDguy's picture

The old 1889 book "The Great Red Dragon" stated that the Money Power's goal was "to own the earth in fee-simple."

When no one can redeem their debts, they get TITLE. Since the loans are created out of thin-air money,

they don't care about the money; they just want TITLE in the end.

Sometimes The Dragon Wins.  (sucks)

hedgiex's picture

Household shedding debts with decreasing share of growth (GDP). You are not going to get the consumption growth. The fillip to global growth from consumption in China is a fantasy. Silver lining is that households are rich without debts in the new paradigm.

Corporate buying high to sell low in the future through debt issuance for share buy-backs and M & As. It portends more mega corporations who can use more tecnhnologies to obliterate labor thus rising unemployment. Only spins work to entice the preys to stay with the junk equities. Silver lining lies with trading the junks in casinos but not investing

Governments increasing debts. Creditor Economies like Germany are not going to take the pill in going on the trade defict route to alleviate the pains of the debtors. (The obverse to trade deficit is the reversal of the capital accounts with the critical funds outflows). Debtor economies in EU are the most exposed with the added cuff of staying in the Euros. Siliver lining lies in all the low lying fruits of emerging markets and commodity based currencies and sovereign bonds to short. Easy metrics to use and identify these basket cases.

Financials. They have benefitted massively from the bail-outs and have been deleveraging more than any sector. Those that do not have loan growth models and are global as financial intermediaries are gems. These are not just junks like Deutsche but include the hedge funds, etc. Silver lining lies in focusing on this sliver and identify those with skins in the game of trading and investing with acceptable leverages.

Optimism lies in being at the center of the greatest generational wealth transfer but of course you must take the trade-off of other values like nationalistic values. These values are the traps of Governments to largely sustain the base for their cronies. No angsts are required if you cheer for "nations rich but you poor".