The $10.6 trillion U.S. corporate debt markets are at an inflection point. Last year's turmoil is in the rearview mirror, and companies are ramping up all the shareholder-friendly activities they couldn’t do during the pandemic — and looking to fund some of it with debt, Axios' Kate Marino writes.

Why it matters: The economy is built on a foundation of credit — and what happens next will determine how soon and how bad the next default cycle will be.

Catch up quick: Government programs helped bring companies back from the brink last year. The Federal Reserve's liquidity injections kept the debt market open for business, and fiscal policy provided money for consumers to keep buying things.

The big picture: On average, U.S. companies’ leverage ratios and ability to afford interest payments are even better now than they were before the pandemic, estimates S&P Global Market Intelligence.

Meanwhile, both the high yield and investment-grade bond indexes are at or near record-low yields — meaning it’s never been cheaper for companies to borrow money.

That’s led to record new debt placements.

• "Debt has become more affordable. As a consequence, all else equal you are incentivizing companies to carry more debt," Scott Ruesterholz, fixed income portfolio manager at Insight Investment, tells Axios.

Last year companies let many of those debt proceeds sit on their balance sheets as a safety buffer. But that's beginning to change.

• For instance, Oracle opted to sacrifice its credit ratings to pile on $15 billion of debt this past spring to fund share repurchases and buybacks. Moody’s now rates Oracle's debt at the lower end of investment-grade status.
• And in high yield, Pilot Travel Centers is in the process of a debt sale that will provide billions in cash to buy back preferred equity held by its wealthy owners.

Some investors expect a continued uptick in this style of corporate behavior: taking out debt to fund things like share buybacks and dividends, or highly levered M&A deals.

Threat level: The "bad" scenario is too many companies taking advantage of the cheap capital to finance aggressive financial engineering that puts them too far in debt.

• This sets up a big market correction or pulls forward a deeper default cycle, which leads to losses for investors like mutual funds that buy the debt.

Some credit managers think that guardrails remain in place to keep more aggressive debt deals isolated to a small portion of companies — rather than create systemic marketwide concern.

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Intel CEO Pat Gelsinger warns the global chip shortage could persist into 2023. (WSJ)

Twitter and Snap reported better-than-expected Q2 revenue growth, and shares of both companies are surging. (Reuters)

Eurozone business activity grew in July at its fastest pace since 2000, according to IHS Markit. (Reuters)

One way companies are raising prices is by reducing the package sizes — without lowering the cost, what's known as "shrinkflation," Axios' Hope King writes.

Why it matters: Analysts expect the practice to impact more products as companies pass down their higher costs, a consequence of pandemic-driven supply and logistics constraints.

Companies like Kimberly-Clark, Scotts Miracle-Gro, Procter & Gamble and General Mills have said they would raise prices this year, but it’s not exactly clear how much of that will come in the form of shrinkflation.

• What is clear: Consumers do notice. 

Whether it’s Family Size Cheerios in two different sizes, one fewer bag of M&Ms in a multipack, smaller Scott Shop towels or shrinking salads at Walmart, the shrinkflation subreddit is filled with recent posts complaining about camouflaged price changes. 

• The site Mouseprint, run by a former Massachusetts assistant attorney general, published photos in May of two Doritos bags that look identical but are half an ounce different.

What they’re saying: "The majority of the portfolio has been through the changes," General Mills spokesperson Kelsey Roemhildt told Axios in response to a query about its products shrinking in size.

• Roemhildt said she couldn’t share more details when asked how many of the company's products experienced downsized packaging this year.

The intrigue: Not everything has shrunk, but these trends and prices tend to stick.

The bottom line: Twelve-month inflation expectations are at their highest levels since 2013, the pace of which the Federal Reserve says is largely temporary due to supply constraints.

Red-hot demand for houses sounds like great news for homebuilders. But builders aren’t as thrilled as you might expect, and one builder is actually turning down orders.

Why it matters: Home prices have surged as low mortgage rates and the pandemic-era demand for more space sent buyers flooding a market that had limited supply.

• In June, existing-home sales rose in all major U.S. regions. The median price of a home sold was a record-high $363,300.

Driving the news: U.S. homebuilding giant D.R. Horton announced on Thursday that its quarterly revenue and earnings growth beat expectations thanks to demand.

• But new orders unexpectedly tumbled 17% to 17,952 homes from 21,519 a year ago. Analysts surveyed by Bloomberg were expecting an increase to 22,385.
• “[W]e have slowed our home sales pace to more closely align to our current production levels,” company chairman Donald Horton said.

The big picture: "Builders are contending with shortages of building materials, buildable lots and skilled labor as well as a challenging regulatory environment," NAHB chief economist Robert Dietz said on Monday after reporting a deterioration in homebuilder sentiment.

Yes, but: After its well-publicized surge, framing lumber prices have crashed all the way back to normal levels.

But, but, but: Framing lumber is just one of many lumber products used to build a house. Oriented strand board (OSB) is another, and the NAHB reports prices for OSB are still up nearly 500% since April 2020.

• Overall, the changes in prices for these softwood lumber products since April 17, 2020, have added $29,833 to the price of an average single-family home as of July 8, the NAHB estimates.

The bottom line: Soaring prices may sound great for business, but they don’t mean much when costs are too onerous and you don’t have the labor or inventory.

Given its assault on democracy, imprisonment of publishers and a slew of human rights violations, "stable" might not be the first word that springs to mind with respect to Hong Kong. But amid social and political turmoil, one key part of the economy has remained unfazed: its legendary financial services sector, Axios Capital author Felix Salmon writes.

Why it matters: Beijing's increasing control and influence over Hong Kong is seen by many banks and investors as more of a feature than a bug. While there are certainly downsides to staying, for the time being, the upside seems to be even greater.

• As Asia Group principal Kurt Tong wrote in a recent essay for Foreign Affairs, "Politics only narrowly affects the core incentives that guide financial and business decisions."

The big picture: Hong Kong has been a gateway to mainland China for centuries. As China begins its crackdown on companies raising foreign capital and listing on foreign exchanges, that's only going to strengthen Hong Kong's hand as the go-to place where shares of Chinese companies can be traded in a fully convertible currency.

Where it stands: Western investment banks are hiring thousands of new employees in Hong Kong, many of them hailing from mainland China.

• They're very unlikely to make any kind of pro-democracy waves, after seeing what happened to local banking giant HSBC when it fell afoul of the Chinese Communist Party.
• Hong Kong has already seen $27.4 billion of IPOs in the first half of this year, per EY's latest global IPO report, making it the third most popular IPO venue in the world. (That's nothing new: It's been in the top 3 every year since 2013.)

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