Running out of coverage

As the Fed goes to Jackson Hole alongside other central bankers to talk about employment, the debate about lowering rates continues, and the question is, if the Fed mandate is broad enough, and what are the implications for the economy at this stage if rates remain at current levels. In the chart below, you can see the median interest coverage ratio of U.S. High yield bonds. To put it simply, it shows how much money the companies make a year compared to the obligation to pay interest on the debt the have outstanding (EBITDA/interest). As you can see, we’re approaching the lowest levels of the last 25 years, which means companies financial health is decreasing. It’s not alarming, but it’s a clear trend. The investment grade universe is undergoing the same dynamic. Now suppose that we do get rate cuts in September through December and that we reach the levels the White House wants (2% or less). And suppose that bond yields start to rise in the medium/long term of the government yield curves around the world, due to inflation concerns, like it’s already happening in the UK or Germany. Wouldn’t that aggravate the problem? Companies would need to either keep maturities low, or issue less debt to keep spreads down. Can corporations reduce debt at this point in the cycle? Are rate cuts the solution?

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