{"id":12708,"date":"2023-09-27T15:53:49","date_gmt":"2023-09-27T15:53:49","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12708"},"modified":"2024-01-10T17:14:38","modified_gmt":"2024-01-10T17:14:38","slug":"even-with-higher-rates-companies-are-borrowing-at-record-pace","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/even-with-higher-rates-companies-are-borrowing-at-record-pace\/","title":{"rendered":"Even With Higher Rates, Companies Are Borrowing At Record Pace"},"content":{"rendered":"\n

How U.S. Companies are Responding to Higher Interest Rates<\/strong><\/p>\n\n\n\n

Basic economic thinking tells us that when interest rates rise, individuals and corporations will borrow less. Higher rates mean higher interest payments, and they also cut into expected returns from borrowed capital. Given interest rates have been climbing steadily since early 2022, one might reasonably expect that corporations have substantially pared back borrowing (via bond issuance) over the past year or so.<\/p>\n\n\n\n

They haven\u2019t.<\/p>\n\n\n\n

During the week of September 4 \u2013 which is typically a busy week for borrowing as Wall Street returns from summer vacation \u2013 investment-grade corporations issued bonds at a record pace. On September 5th alone, 19 companies sold 47 bond tranches in the U.S., the highest number recorded since 2012. Bond sales totaled nearly $38 billion on that day, which was the largest amount of corporate bonds sold since April 2020, when interest rates were effectively 0%.1<\/sup><\/p>\n\n\n\n

High levels of bond sales come at a time when investment-grade corporations are paying an average yield of 5.7%. For companies refinancing, that\u2019s about 2% higher than the bond they\u2019re replacing (on average). As readers can see in the chart below, 5.7% is the steepest yield investment grade companies have had to pay in over a decade. In fact, high quality firms have not paid this much to borrow since the Global Financial Crisis.<\/p>\n\n\n\n

Worried About the Effects of Interest Rates on Your Investments?<\/a><\/span><\/strong><\/p>\n\n\n\n

Whether you are worried about interest rates or volatility, I recommend that investors think long-term and focus on key data that can help guide their investments.<\/p>\n\n\n\n

To help your investing process, I am offering all readers a look into our just-released September 2023 Stock Market Outlook Report.<\/a><\/span><\/strong> This report contains some of our key forecasts to consider such as:<\/p>\n\n\n\n

\u00b7 Top-down S&P500 yearend 2023 and 2024 targets
\u00b7 Zack\u2019s view on equity markets
\u00b7 Setting U.S. returns expectations for 2023
\u00b7 And more\u2026<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<\/p>\n\n\n\n

Download Our Just-Released September 2023 Stock Market Outlook Report2<\/sup><\/a><\/span><\/strong><\/p>\n\n\n\n

Corporate Bond Yields (Moody\u2019s AAA-Rated)<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

It\u2019s clear from issuance, however, that corporations are still choosing to borrow. There may be a couple of reasons why.<\/p>\n\n\n\n

First, some corporations may feel some uncertainty over where interest rates are heading from here. The Federal Reserve continues to express caution about the inflation fight, and the U.S. economy has been delivering better-than-expected growth to date. The idea that interest rates could tick even higher from here \u2013 and stay there for a period of time \u2013 has some companies betting that now is a better time to borrow than three or six months from now.<\/p>\n\n\n\n

But a second, more compelling reason for high levels of borrowing, in my view, is that corporations have optimistic outlooks about both economic and earnings growth \u2013 and they want to invest.<\/p>\n\n\n\n

On one hand, fiscal incentives to invest are high at the moment. Government programs like the 2022 Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the 2022 CHIPS Act in total will deliver about $2.4 trillion in new spending, which has already resulted in hundreds of billions of new investments in areas like semiconductor chip factories. A look from the Q2 earnings season found that over 60% of S&P 500 companies increased investment over the past year. As seen in the chart below of private nonresidential fixed investment, year-over-year growth has averaged about 10% \u2013 even as interest rates have climbed over the same stretch.<\/p>\n\n\n\n

Business Investment (Year-Over-Year % Change)<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Corporations are paying more to borrow, but it\u2019s also true that spreads (the difference between yields on investment grade bonds and 10-year U.S. Treasury bonds) have narrowed over the past few months. I think this narrowing spread is largely a result of an improving economic outlook, combined with strong corporate balance sheets.<\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis5<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

I\u2019m not making the argument that higher interest rates are meaningless to individuals or businesses when making decisions about borrowing and investing. However, the data above suggests that the relationship between interest rates and investment\/economic activity is not quite as linear as is often suggested. Sometimes higher rates put a major dent on investment and borrowing, thus hurting economic activity and resulting in recession. But sometimes they don\u2019t. The overall stability of the U.S. housing market, in the face of higher mortgage rates, underscores this point as well.<\/p>\n\n\n\n

There are also areas of the market where higher rates do make a big impact, such as with less creditworthy corporate borrowers or those with high debt loads relative to earnings. For these companies, higher rates are much more of a major issue, and default risk is likely to keep going up. From a fixed income investor standpoint, these would be bond issues to avoid.<\/p>\n\n\n\n

During times like these, I recommend looking at current market trends and data to better guide your investing decisions. To help you do this, I recommend reading our Just-Released September 2023 Stock Market Outlook Report.<\/a><\/span><\/strong> This will give you access to:<\/p>\n\n\n\n

\u00b7 Top-down S&P500 yearend 2023 and 2024 targets
\u00b7 Zack\u2019s view on equity markets
\u00b7 Setting U.S. returns expectations for 2023
\u00b7 And more\u2026<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<\/p>\n\n\n\n

Download Our Just-Released September 2023 Stock Market Outlook Report6<\/sup><\/a><\/span><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

One might think higher rates would lead to less corporate borrowing, but in this economic environment other factors are driving increased bond issuance. <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-12708","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12708","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12708"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12708\/revisions"}],"predecessor-version":[{"id":12713,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12708\/revisions\/12713"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12708"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12708"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12708"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}