Governments and companies around the world are facing unprecedented costs to refinance bonds, a burden that’s set to deepen fissures in debt markets and expose more vulnerabilities among weaker borrowers.
A corporate treasurer or finance minister looking to issue new notes now would likely have to pay interest that’s about 156 basis points higher on average than the coupons on existing securities, after that gap surged to a record in recent days. That all adds up to about $1.01 trillion in additional costs if all those securities were refinanced, according to calculations using a Bloomberg index tracking some $65 trillion of government and corporate debt across currencies.
That broad benchmark of global debt lost 6.8% last quarter, its second-worst drop after a record slide in the previous three months, data stretching back to 1999 show. Monday brought little relief, with spreads on Asian high-grade dollar bonds little changed after blowing out the most in six months last week.
Rolling over debt is proving increasingly tricky for weaker borrowers as creditors price in risks of a global recession. Most governments and companies are still able to stomach the higher financing bills, but soaring fund outflows and volatility are causing credit markets to start to buckle. Banks last week had to pull a $4 billion leveraged buyout financing, and even investment-grade debt funds suffered one of the biggest cash withdrawals ever.
Actual overall refinancing costs will depend on where rates are when borrowers do roll over debt, and of course many with longer-term obligations won’t need to do so anytime soon. Still, with the Fed expected to raise its target rate more than a percentage point before year’s end, there’s also a risk borrowers could face even higher costs if they hold off.
Central banks must walk a fine line as they fight some of the worst inflation in decades, with Bank of America Corp. strategists recently warning that the Federal Reserve needs to slow the pace of rate hikes to prevent credit market dysfunction.
Concerns are also growing that liquidity is draining out of the world financial system as interest-rate swaps -- one of the world’s deepest markets -- fluctuate wildly. The gap between the floating- and fixed-rate legs of longer-dated swaps tied to the US Secured Overnight Financing Rate swung in some recent days by the most on record for the index, which was rolled out in October 2020 as a replacement for the London interbank offered rate.
Six US-based borrowers tracked by S&P Global Ratings defaulted in August, as signs mount that higher rates are already taking a toll on stretched borrowers’ ability to keep issuing new debt to pay off old. Other examples of debt stumbles abound, including in Asia where Sri Lanka defaulted on its borrowings earlier this year, and Chinese property firms have suffered record nonpayments.
“The era of cheap money is certainly over,” said Neil Shearing, group chief economist at Capital Economics. “We are at the start of a global recession in our view and that includes a recession in Europe, which is particularly weak.”
Fed bankers dispelled in recent weeks any suggestion they are near halting interest rate hikes even if it means pain for the economy. That’s even after embarking on one of the most aggressive hiking cycles in modern times and their third consecutive 75-basis point interest rate increase in September.