As we’ve mentioned in recent months, total risk premia on US corporate bonds is at its lowest level ever. Meanwhile, the debt that US corporates have loaded onto their balance sheets has steadily climbed to the point where leverage is now at an all-time high. While the credit to GDP calculation uses market value (recently supported by tighter credit spreads and lower bond yields) rather than book value, the US corporate sector still remains in a highly leveraged position relative to the spreads which their bonds are offering.
As long as US Treasury yields remain low and credit spreads remain tight, debt can continue to be serviced. Record high levels of leverage, however, suggest an underlying fragility to the corporate credit sector should debt service costs begin to pick up on the back of higher US Treasury yields and/or wider credit spreads.