The proportion of highly-indebted but unprofitable U.S. companies has escalated since the pandemic began. Some worry that there is a growing mass of pent-up corporate defaults that represent a ticking time bomb for the U.S. financial system, a biproduct of years of ultra easy monetary policy. The chart shows that the proportion of zombies has indeed increased over the past year, but only to near the long-term mean. This does not constitute a systemic risk, although the U.S. may only be in the early innings of a major corporate leveraging cycle. Near term, the surge in oil prices provides some interesting opportunities in zombie energy company bonds.
October 31, 2021