by Connor Darrell, Head of Investments
Bonds rallied last week, with the 10-Year Treasury yield dropping back below 3% and the Bloomberg Barclays U.S. Aggregate Bond Index posting gains of 0.74%. Stocks produced mixed results, with the U.S. outperforming its International counterparts.

Another By-Product of “Low for Long” Interest Rates: Corporate Debt
Moody’s, a well-respected provider of credit research, issued a sobering report earlier this month warning of the potential for “a particularly large wave” of defaults on below investment grade corporate bonds when the next economic downturn eventually arrives. The report cites the low interest rate environment as a key contributor to a significant increase in the amount of corporate debt outstanding and a subsequent rise in the number of global non-financial companies carrying below investment grade credit ratings.

Coming out of the financial crisis, with interest rates at their lowest levels in decades, many corporations took advantage of the low rates to go out and borrow additional funds to invest in their businesses. And with investors starved for yield, even many companies that were in poor financial health were able to issue debt at relatively low rates. This has been beneficial to the overall investment climate and a tailwind for the stock market, but may leave many companies exposed in the event of a prolonged economic downturn.

Default rates on corporate bonds remain very low, but the Moody’s report highlights the need to be vigilant, even in strong economic environments. We have discussed in past communications that we find ourselves in uncharted waters with respect to monetary policy, making it even more important to be on the lookout for potential risks in the marketplace. Rising levels of corporate debt is certainly one of those risks to watch.