Corporate borrowing is up this month, despite rising interest rates
Corporate borrowing is up this month, despite rising interest rates
It’s been a busy month in the corporate bond market. So far this month, corporate bond issuance is up 68% compared to April, according to the research outfit CreditSights.
You might think companies would hold off on borrowing, given how much interest rates have risen over the last year. But companies have plenty of reasons to load up on debt right now.
One reason corporate borrowing is up this month is because some big mergers are underway, including Pfizer’s $43 billion purchase of the biotech company Seagen.
It also helps that government Treasury bond rates have been relatively stable, said Drew Pascarella, senior lecturer of finance at Cornell University.
“Corporate bond rates are a function of the Treasury bond rates,” he said. “They’re priced off the Treasury bond rates, so the more stable those rates are, the more predictable bond rates will be for corporate issuers.”
Companies are also keeping an eye on all the “Will they? Won’t they?” in Congress over raising the debt limit, said Chuck Tomes at Manulife Investment Management.
“So they’re trying to get ahead of a time where it could become a little more volatile,” he said.
That’s because if the government does default on its debt, there’s a chance that government bonds might not pay out, said Winnie Cisar, global head of strategy at CreditSights.
“And if there is uncertainty about whether investors will actually get paid back, then most likely, investors are going to be conserving their cash,” she said.
If investors hold on to their cash, corporate borrowing could get even more expensive since companies would have to lure investors by paying more interest.
“And if I’m a management team who needs to raise some cash, I’d probably rather just get it done today,” Cisar said.
We also don’t know if the Federal Reserve will raise interest rates again next month and whether a recession will happen this year, she said — all reasons that companies would rather borrow now.
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