{"id":2996,"date":"2015-11-06T20:50:12","date_gmt":"2015-11-07T01:50:12","guid":{"rendered":"http:\/\/162.223.13.186\/~zacksim\/corporate-debt-sends-signal-to-investors\/"},"modified":"2022-02-26T13:23:03","modified_gmt":"2022-02-26T13:23:03","slug":"corporate-debt-sends-signal-to-investors","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/corporate-debt-sends-signal-to-investors\/","title":{"rendered":"Corporate Debt Sends Signal to Investors"},"content":{"rendered":"

There was a tinge of nervousness in corporate debt markets toward the end of September when investment-grade companies sold just $105 billion of new debt. Sounds like a big number, but it marked a 20%+ decline from a year earlier and was the weakest September in four years (September is historically a strong month for bond issuance).<\/p>\n

To make matters shakier, credit spreads widened over the same period that issuance fell materially. Looked at in a vacuum, it created the eerie feeling that the credit cycle might be nearing an end, which in many cases portends an economic recession.<\/p>\n

High and Rising Credit Spreads Have Signaled Recession in the Past<\/strong><\/p>\n

Fred1<\/strong><\/p>\n

October Changed the Story Line<\/strong><\/p>\n

October\u2019s stout month in the investment grade debt markets allayed fears that might have materialized in September\u2019s wake. Investment grade corporate debt issuance hit $103 billion, an all-time high for the month, and spreads narrowed back to attractive levels. Lower spreads mean that the market does not need a big premium over U.S. Treasuries, which implies that investors perceive a low risk of default.<\/p>\n

Thinking about this another way, low corporate yields and spreads also imply investors are confident economic conditions are ripe for corporations to perform well. Confidence in the economy and corporate America, both quantitatively and qualitatively, is also a strong signal for confidence in equities.<\/p>\n

Many don\u2019t appreciate this, but it\u2019s a unique time in the history of bond yields \u2013 both corporate and U.S. Treasuries. It\u2019s easy to forget that there was a time in the late 1970\u2019s and early 1980\u2019s when double digit inflation was a concern and investment grade corporations had to pay well over 10% interest to borrow money in the capital markets.<\/p>\n

Fred2<\/p>\n

Compare yields in the 1980\u2019s and 1990\u2019s with Microsoft\u2019s October bond sale of $13 billion (in various maturities), none of which were priced at greater than 2% to comparable U.S. Treasuries. Top-tier corporations are essentially able to access capital markets for borrowed money at the risk-free rate! It\u2019s no wonder that strong corporations are taking little issue with borrowing, even if it\u2019s ultimately returned to shareholders in the form of share buybacks or acquisitions. The return on capital borrowed does not have to be very high at all to keep up with interest payments down the road, and I expect this to be the case going forward for some time. Borrow away.<\/p>\n

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

2015 is on pace to be yet another record-breaking year for corporate bond issuance. Instead of looking at it as \u201cdebt-crazed corporations\u201d, it\u2019s wiser to see these corporate treasurers as being opportunistic in a low interest rate environment. The fact that the market is not demanding higher premiums (as reflected through low yields) is a sign of investor confidence in steady economic growth conditions, which should lead to a favorable environment for corporations in the near to medium term.<\/p>\n

The signal for investors here is to see the corporate bond market as an indicator for U.S. equities \u2013 the health of one generally corresponds tightly with the health of the other.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

There was a tinge of nervousness in corporate debt markets toward the end of September when investment-grade companies sold just […]<\/p>\n","protected":false},"author":1,"featured_media":4122,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59,60,63,71],"tags":[],"class_list":["post-2996","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-professionals","category-institutional-investors","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/2996","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\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=2996"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/2996\/revisions"}],"predecessor-version":[{"id":11500,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/2996\/revisions\/11500"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=2996"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=2996"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=2996"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}