A coming credit crunch?
If small and medium size companies aren't able to raise capital through corporate bond sales, like dominos falling, effects could ripple throughout the economy.
We talk a lot about the stock market, but the real lifeblood of U.S. companies is the corporate bond market, which is twice as large.
Companies, like consumers, live on debt. But unlike consumers, corporations don’t take out mortgages or run up their credit cards. Instead, they sell bonds to big investors, like mutual funds and pension funds. Corporate bonds sales help companies pay employees, and cover the basics, like keeping the lights on.
But something is shifting in the world of these corporate bonds. As the financial markets have become more volatile and Europe continues to be on the brink of a eurozone breakup, big investors are seeking safer havens. Their pick? The bonds of giant, stable corporations. This could leave small and medium sized companies out in the cold.
Jeff Meli is the global head of credit strategy for Barclays. He says this potential credit crunch for smaller businesses could have a real domino effect.
First, for individuals, the pricier bonds from larger companies could mean lower returns on mutual funds and those fees could be passed on to you as higher transaction costs.
Second, for the overall economy, smaller companies could become even more reluctant to hire new employees. Smaller businesses have often been real engines of job creation. Meli says we're not close to this credit crunch yet, but if small companies fail to hire, it could slow down the overall recovery even more.