Over the past decade, the Fed has kept interest rates at historically low levels. These low interest rates have incentivized U.S. Companies to borrow, adding significant debt to their balance sheets. As reported by the Wall Street Journal, the gap between investment-grade U.S. corporate bonds and U.S. Treasuries has reached its highest level in two years. Similarly, the spread between junk-rated bonds and U.S. Treasuries have hit a 19 month high.
Meantime, General Electric Co. (GE), once considered the bluest of blue chip stocks with an immaculate credit history, may now be the poster-child for over-borrowing. The stock, which traded at roughly $30 per share two years ago, is now under $8 per share. Its bonds are approaching junk territory, with S&P downgrading its debt in October from A to BBB+. If GE debt falls to junk levels, it would make up one-tenth of $1.2 trillion bond market according to data from Fitch Ratings.
GE’s free fall has led market experts to eye other companies with significant debt that may be exposed problems similar to those GE faces. Indeed, if GE’s debt issues are indicative of a broader corporate over-borrowing problem, it could spell trouble for the economy moving forward.