Corporate bonds have been having a banner year
From time to time, we like to check in on the bond market, especially government bonds, given how much influence their yields have on mortgages and other types of borrowing costs in this economy. But another type of bond has been particularly popular this year: corporate bonds that big companies issue to finance their operations.
Demand for corporate bonds has been skyrocketing recently.
Back when the Federal Reserve was raising interest rates, demand for corporate bonds was pretty weak. Winnie Cisar, head of strategy at CreditSights, said that’s because the Fed’s rate hikes made government bonds look a lot more attractive.
“For an investor, it’s all about where you can get the most bang for your buck, or the highest return on investment, with relatively similar risk,” Cisar said.
But now that the Fed has begun to lower interest rates and government bond yields have been falling, those corporate bonds are looking a lot better by comparison.
Especially because the labor market’s been resilient. Cisar called it a sign that investors can feel more comfortable buying corporate bonds.
“Companies are not needing to do layoffs or stop hiring,” Cisar said. “And that indicates that the fundamental health of corporate America is still in good shape.”
As a result, companies have been issuing a lot of new debt.
“This is the right opportunity to take advantage of the increased appetite from investors,” said John Bai, a finance professor at Northeastern University.
He said all the demand for corporate bonds is giving companies an excuse to hoard extra cash, either as a reserve in case the economy turns south or to invest it back into the company.
“You can use it for [research and development] purposes, or you want to grow through either building a new factory yourself, a manufacturing facility, or acquiring another company,” Bai said.
Some of those choices are more helpful for the company itself than for the broader economy. But Kathy Bostjancic, chief economist at Nationwide, said more corporate borrowing can have positive ripple effects.
“If companies are optimistic and they’re investing, they also tend to be hiring workers as well. So, that can be a very positive sign,” Bostjancic said.
Plus, corporate bond yields have been falling too. Bostjancic said if more vulnerable companies can issue new debt at cheaper rates, they can avoid having to make painful decisions.
“If those high interest costs were not lowered, then they’d have to cut expenses in other ways. Could be pulling back on investment, but it could also be reducing payroll costs.”
In other words, higher sales of lower-yield corporate bonds can help the labor market stay resilient.
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