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With companies on borrowing spree, Federal Reserve expands lending backstops

Justin Ho Apr 9, 2020
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Corporate debt has been attractive to investors over the past decade. Johannes Eisele//AFP via Getty Images
COVID-19

With companies on borrowing spree, Federal Reserve expands lending backstops

Justin Ho Apr 9, 2020
Corporate debt has been attractive to investors over the past decade. Johannes Eisele//AFP via Getty Images
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The Federal Reserve’s rescue program includes support for the corporate debt market. Fed Chair Jerome Powell has mentioned his concern about corporate debt levels in the past. The Fed announced Thursday that it is expanding its support to “backstop” a wider range of business lending.

Corporate debt ranges from safe investment-grade debt to risky high-yield bonds. Chuck Tomes, a portfolio manager at Manulife Investment Management, said any way you slice it, over the last 10 years corporations have been borrowing a lot of money.

“It’s the most that it’s ever been on a historical basis,” Tomes said. All that corporate debt has been attractive to investors, pension funds, insurance companies, mutual funds and exchange-traded funds. And with negative interest rates in Europe and Japan, Tomes said, foreign investors have been looking around for other places to park their money.

“They’re finding it in, in a lot of cases, the U.S. corporate bond market,” he said.

Now that the Fed is widening its support for corporate debt, some companies already have taken to borrowing more, according to Marquette University professor Matteo Arena.

“We’re seeing a lot of companies in the last week going out and issuing large amounts of debt, at very low rates, and for many companies it’s very close to zero percent,” Arena said.

There’s already $5.4 trillion worth of investment-grade corporate debt out there, said Collin Martin, fixed-income strategist for the Schwab Center for Financial Research.

That might sound scary, but he says for stronger sectors, like financial companies, more borrowing can be a positive.

“The fact that corporations can issue this debt to kind of serve as a bridge to get them through [the economic slowdown caused by the pandemic] should be good for the longer-term health for a lot of corporations,” Martin said. The risk, he added, falls on heavily indebted companies in sectors that are getting hammered, such as tourism, energy and department stores.

“Those companies are going to see a significant negative hit to their cash flows,” Martin said. “It’s going to be tough to service those debts.”

The Fed said it plans on purchasing some riskier assets, but Martin says that doesn’t mean the Fed can keep companies out of default.

COVID-19 Economy FAQs

So what’s up with “Zoom fatigue”?

It’s a real thing. The science backs it up — there’s new research from Stanford University. So why is it that the technology can be so draining? Jeremy Bailenson with Stanford’s Virtual Human Interaction Lab puts it this way: “It’s like being in an elevator where everyone in the elevator stopped and looked right at us for the entire elevator ride at close-up.” Bailenson said turning off self-view and shrinking down the video window can make interactions feel more natural and less emotionally taxing.

How are Americans spending their money these days?

Economists are predicting that pent-up demand for certain goods and services is going to burst out all over as more people get vaccinated. A lot of people had to drastically change their spending in the pandemic because they lost jobs or had their hours cut. But at the same time, most consumers “are still feeling secure or optimistic about their finances,” according to Candace Corlett, president of WSL Strategic Retail, which regularly surveys shoppers. A lot of people enjoy browsing in stores, especially after months of forced online shopping. And another area expecting a post-pandemic boost: travel.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

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