There are other signs that stress is spreading, though it is not yet at recessionary levels””not least because corporate profits remain at record highs in America, and many firms have taken advantage of the years of plenty to get their balance sheets in shape. Even so, Home Depot recently said that it can no longer afford to continue with its share-repurchase plan. In the most recent survey of banks’ senior loan-officers, 19.2% reported a tightening of lending standards to large and medium-sized firms, up from 7.5% three months earlier, and zero a year ago. Surveys of small companies suggest they are finding it harder to get the credit they need to grow.
Between June 12th and November 19th, the spread in interest rates between high-yield corporate debt and Treasury bonds doubled, from 2.6 percentage points to 5.2, says Ed Altman of New York University. The yield on high-yield bonds has risen to 9.33%, the highest level since 2002 and a sign of growing default risk, even though defaults remain near a historic low.
Mr Altman is especially worried by the large amount of low-quality debt issued in recent years, much of it to finance private-equity deals. Some 42% of high-yield corporate bonds issued since 2003 were rated B- or lower, rising to nearly 50% in the first six months of this year. Moreover, some $160 billion of leveraged loans are coming due next year. Refinancing them may be a struggle in today’s financial markets.