Three decades ago, the club of triple A-rated American corporate borrowers was a busy place. About 60 big companies, ranging from Pfizer to General Motors, were deemed so “safe” that they held this coveted tag from the credit rating agencies.
No longer. Standard & Poor’s has just stripped the mighty ExxonMobil of its triple-A rank because of understandable concerns about falling oil prices and mounting energy sector debt.
This leaves just two - yes, two - American companies still in that triple-A club: the unlikely duo of Microsoft and healthcare giant Johnson & Johnson.
Does this matter? Not for company executives, perhaps. Some Wall Street economists, such as Henry Kaufman, fear American companies are becoming feckless with debt; but in practical terms, the cost of funding triple-A debt today is roughly the same as that of double-A debt. For Exxon, in other words, the “pain” is primarily symbolic.
The much more interesting question is what this shrinkage means for investors. If you are a risk-averse private investor - or a nervous public pension fund - who favours ultra-safe bonds, your choices in the corporate world are now very small. And this highlights a much bigger point: what has happened in corporate debt is just one tiny sign of a global shortage of “safe” assets.
Think about it. A couple of decades ago, risk-averse investors seeking triple-A bonds had three routes to pursue. First, there was the club of triple-A corporate debt. Second - and the most important source of safe debt albeit a shrinking one - was sovereign debt. Then, from the late 1990s, financiers produced another option: repackaged mortgage-backed bonds.
Since 2007, those triple-A mortgage-backed securities have disappeared. Meanwhile, less of that sovereign debt is now deemed super safe; just look at what has happened to bonds from Italy, Greece and Portugal.
Indeed, economics professors Ricardo Caballero and Emmanuel Farhi calculate, using data from Barclays, that between 2007 and 2011, the value of safe assets fell from $20.5tn to $12.2tn, equivalent to a drop from 36.9 per cent of global gross domestic product to a mere 18.1 per cent.
That is startling - doubly so since investor demand for safe assets has exploded. The financial crisis prompted investors to dash into havens. Meanwhile, post-crisis regulatory reforms have forced financial institutions to load up with “safe” assets, too, to be used as collateral for deals.
And what has made this imbalance worse - and government policy even more perverse - is that regulators are tightening the screws at the same time as central banks have gobbled up safe assets with the aim of loosening monetary policy.
The net result is a dire squeeze on safe assets. Indeed, Prof Caballero and Prof Farhi argue the imbalance is so severe that the problem confronting the world today is not a “liquidity” trap but a “safety trap”: the shortage is creating a self-reinforcing, panicky cycle that is contributing to stagnant growth.
Is there a solution? In the long term, the only sensible option would be for central banks to stop sucking up those government bonds so voraciously; this is distorting the system to such a degree that it is harming, not helping, investor psychology.
Another option, which is favoured by economists such as Paul Krugman, and has been supported by some economists at the Bank for International Settlements, would be for the government to sell more safe debt.
In the long run that might seem self-defeating; if debt loads rise, ratings will slip. But, in the short term, higher issuance would at least reduce the squeeze, enabling the safe asset market to feel less distorted.
However, there is a third option: regulators could stop forcing private institutions to gobble up “safe” debt. Mervyn King, the former British central bank governor, for example, suggests in his book, The End of Alchemy, that instead of forcing banks to load up on safe assets, central banks should act like “pawnbrokers”, lending against a wide range of collateral at preset discounts.
But none of those three policies seems likely to emerge soon. As a result, the risk is that the imbalance between supply and demand will grow worse, not better.
Little wonder, then, that global interest rates remain so astonishingly low. This is a symptom - and not a cause - of a deeply distorted financial world; an era where the idea of safety is creating dangers that nobody could have imagined three decades ago.
