On Monday’s program, Marketplace’s Sabri Ben-Achour told us about the yield on two-year Treasury notes. It’s been falling, which means investors are expecting a weaker economy and lower interest rates over the next couple of years.
Those same concerns are playing out in the market for corporate bonds.
Over the last few days, the issuance of corporate bonds has slowed to a crawl. In fact, things are so slow that some traders are saying the corporate bond market has effectively closed down.
The problem is uncertainty.
“If you don’t know what XYZ company’s profits are going to be six months from now, you’re probably going to charge more in order to lend to them,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.
He said companies feel it when their borrowing costs increase, even a little. It’s just like a mortgage.
“If you have to pay an extra quarter of a percent on a 30-year bond issuance as a company today, well, that’s a lot of expense over the next 30 years. It doesn’t sound like much, but it’s a lot,” said LeBas.
As a result, companies are holding off borrowing money by issuing bonds.
Winnie Cisar, head of strategy at CreditSights, said companies have been tapping other lending sources.
“They have access to bank lines of credit, which is basically like a massive credit card. There’s also the commercial paper market, which is another short-term source of funding,” said Cisar.
Cisar said companies will start inching back into the corporate bond market. But as long as the economy remains so uncertain, corporations won’t issue very many bonds, she added.
“The outlook for the broader economy, and tariffs, and taxes, and geopolitical — those are going to be the things that probably give management teams a little bit of pause,” said Cisar.
Meanwhile, any company that does issue new debt, say, to refinance old debt will have to contend with those elevated interest rates.
Evan Rawley, a finance professor at the University of Connecticut, said that’s going to limit what companies want to do with the money they borrow by selling bonds.
“They still might make the investment they think is the home run, but they might not make the investment that they’re less sure about,” said Rawley.
Rawley said that means companies might focus on short-term investments that don’t require much borrowing — say, sprucing up a retail storefront.
But longer-term investments that require a lot of borrowed money? Probably not gonna happen.
“When you look at something — oil and gas, or mineral extraction, or maybe even pharma, or things that have returns that are way out in the future — those are the things that are the first to go when interest rates go up,” said Rawley.
So a slowdown in the corporate bond market is a drag on economic growth.
