Long-term debt on the rise
Companies and governments around the world have taken record volumes long-term debt since the beginning of the year, the Times writes Financial. Extremely low interest rates on international capital markets and abundant demand for investment assets have encouraged government and corporate borrowers to issue an unprecedented 253 billion. Dollars in long-term securities, according to the Dealogic. This is a significant increase compared to 188 bln. Dollars for the same period of 2014
Growth and inflation
The popularity of long-term debt signaled that investors bet on continued stagnation of global economic growth and low inflation. These sentiments contrary to the forecasts of the major central banks begin to prepare to raise interest rates because of improving economic indicators.
Financial markets do not seem so optimistic. “Borrowers take long-term loans because the yield is very low. And the yield is low, because the markets invested in assessing expectations for prolonged environment of low growth and inflation,” said Alberto Gallo, macroeconomist at Bank RBS. “Take for example the corporate sector. If companies believe that economic prospects are positive, they use cheap debt to invest. Instead, they borrow to make redemptions of shares,” he added.
Long-term bonds are more sensitive to changes in interest rates, which means that the trend of growth can bring losses to investors. Basically expectations for immediate increase in interest rates reduces the demand for long-term securities. Bonds with a maturity of 30 years and above are usually issued by borrowers rated as the German and British governments and corporations like British American Tobacco, Microsoft and Siemens.
Increased demand leads to inclusion of riskier borrowers. In April, Mexico became the first country to issue euro-denominated 100-year bonds. Shares were sold at a relatively low yield of 4.2%, although in the past the country is insolvent. Two months later, the Brazilian state oil company Petrobras successfully issued 100-year debt worth 2.5 bln. Dollars, although her name was implicated in corruption scandals. Last year Canada first issued 50-year bonds.
The sale of long-term debt with lower interest rates for governments and companies to postpone their needs for refinancing and to maintain a low cost of financing. The popularity of long-term debt help and demographic trends. Intermediaries direct sales of this type of debt to insurance and pension companies, which need long-term assets to meet the increasing because of the aging population long-term obligations.