The news from corporate America has not been good as the U.S. economy continues to weaken. So far this year, the number of corporations that have had their debt ratings lowered has increased dramatically even though the economy is not officially in a recession. It the economic downturn proves to be serious, the downgrading of corporate securities and defaults can be expected to increase accordingly.
The message for bond buyers then is to buy high-grade securities, and from the standpoint of taxable securities, it might be wise to stick with U.S. Treasuries. With a huge deficit to finance, the Treasury will be quite busy and the returns should be attractive. Plus they need your support.
More explicit data concerning the debt creation of the 1980s were provided by Moody's Investor Service in its recent list of corporate rating downgrades, which shows that through the first three quarters of 1990, the rating reductions of U.S. corporations were up an annualized 21 percent over 1989's record total. There were 308 corporate rating downgrades affecting $293 billion of debt, while there were only 79 rating upgrades affecting $64 billion of debt.
Downgrades to the Caa rating warn of the proximity of default. Through the first nine months of the year, Moody's downgraded 61 ratings to Caa, which exceeded the 52 for all of 1989. The Bond Investors Association reports that through September there have been $15.8 billion in defaults.
The two-year Treasury note auction scheduled for last week has been rescheduled for Tuesday. It should return 7.80 percent.