U.S. companies rush to borrow

Mitchell Hartman May 18, 2011

U.S. companies rush to borrow

Mitchell Hartman May 18, 2011


JEREMY HOBSON: Now let’s get to the corporate borrowing bonanza that’s going on. Big companies are loading up on debt this week because of extremely low interest rates. But interest rates have been low for a while so why are companies borrowing so much now?

David Kelly is chief market strategist at JP Morgan Funds. He’s with us live from New York. Good morning David.

DAVID KELLY: Good morning.

HOBSON: So why this borrowing bonanza this week?

KELLY: Well, I think there are two things. I think first of all, corporations actually feel a little bit better than consumers right now because corporate profits have been soaring. And in fact, corporate profits are almost back to where they were before the last recession started. So I think that helps. But the other thing is that corporations worry that the Federal Reserve is going to eventually begin raising interest rates. At the end of June, they’re going to stop buying treasury bonds in the way they have been buying them. And that could push interest rates higher. And so they just don’t want to miss out on the opportunity. They’d be kicking themselves if rates were much higher later on and they had to borrow at higher rates next year.

HOBSON: And we saw this morning that mortgage rates are also dropping just like corporate borrowing rates. Why aren’t people going out to buy homes in the same way?

KELLY: Yes. It’s such a great time to buy a house right now with prices down and mortgage rates as you say at extremely low levels. But one of the things that’s really hurting the consumer side or the household side here is that people lost so much home equity. I mean in order to move up in a house, you have to put some money down. And now you have to put much more money down than a few years ago. And the problem is a lot of people are under water. They don’t have more equity to put into buying more houses or more expensive houses and that’s really clogging up the whole housing market. I think that’s one of the key reasons why housing is so subdued even though corporate borrowing is moving up.

HOBSON: David Kelly, chief market strategist with JP Morgan Funds, thanks so much.

KELLY: You’re very welcome.


JEREMY HOBSON: This week has been one of the busiest of the year for companies looking to borrow money in the corporate bond market. Yesterday, for example, Johnson and Johnson had its biggest bond sale ever.

Marketplace’s Mitchell Hartman joins us now live with more on this story. Good morning Mitchell.


HOBSON: So a lot of companies — they’ve saved up a lot of cash during the recession — why do they want to borrow money right now?

HARTMAN: Well, three words: low interest rates. Between the Federal Reserve’s easy monetary policy and banks that are now ready to lend — it just makes sense to borrow right now. And interest rates will probably be head up before too long. I mean, Texas Instruments, which just sold $3.5 billion in debt — it’ll pay under 1 percent interest on some of the notes. That’s crazy cheap money.

HOBSON: Crazy cheap money — but what are they going to do with it?

HARTMAN: Well, so in the case of Texas Instruments, it’s to buy National Semiconductor. In other words, they’re investing in the business for future growth. That’s what’s driving a lot of big firms, according to economist Robert Carnell at the ING Group.

ROBERT CARNELL: There has been an absolute dearth of investment since the financial crisis and there will come a point where firms do decide to start expanding capacity — partly for domestic reasons, but the external demand environment looks pretty good for the bigger firms with export markets, and with the weaker dollar, some of that will take place on U.S. territory rather than overseas.

So these big companies will likely spend at least some of the money to build factories, buy new trucks, whatever, do R&D — right here in the U.S.

HOBSON: Marketplace’s Mitchell Hartman, thanks.

HARTMAN: You’re welcome.

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