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US corporate bonds: An uneasy credit mix

According to Moody's Investors Service, there were 82 downgrades of US corporate credit ratings in the second quarter of 1998, the most for any three-month span since 1991 when the US economy was deep in recession. For the first time in nine quarters, the number of downgrades outstripped the number of upgrades (79 ratings were upgraded from April to June 1998).

This bad news for US corporate bondholders is balanced, and even outweighed, by some apparently conflicting good news about US corporate credit quality. True, the number of issuers being downgraded is high, but these issuers actually represent a much smaller par value of bonds than the par value of the bonds from issuers being upgraded. For every $1 dollar worth of bonds being downgraded, $2.38 of bonds were upgraded: a high ratio by recent standards. When credit analysts reacted favourably to SBC Communications' proposed acquisition of Ameritech, they upgraded $34 billion worth of securities at a stroke. It would appear that the credit quality of many large American corporations is improving at the same time as the quality of many smaller companies is declining.

However that has not stopped the Federal Reserve from voicing its concerns about unwarranted relaxation of lending criteria and the danger that, come the next economic downturn, some borrowers may struggle to meet their obligations.

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