We like to check in on the bond market from time to time, given how much the bond market, and especially government bond yields, have a huge impact on the cost of mortgages and other types of borrowing in this economy. But another type of bond has become particularly popular this year. They are corporate bonds issued by large corporations to raise funds for their operations.
Demand for corporate bonds has increased rapidly recently.
At the time the Federal Reserve was raising interest rates, demand for corporate bonds was quite weak. Winnie Schiesser, head of strategy at CreditSights, said this is because the Fed’s interest rate hikes have made government bonds even more attractive.
“What matters to investors is where they can get the highest return on their investment for relatively similar risks,” Sissar says.
But now that the Fed has started cutting interest rates and Treasury yields have fallen, these bonds look much better by comparison.
Especially since the labor market is showing resilience. Cisar said this is a sign that investors can feel more comfortable buying corporate bonds.
“Companies don’t have to cut staff or stop hiring,” Cisar said. “And it shows that the fundamental health of American businesses remains good.”
As a result, companies are issuing large amounts of new debt.
“This is a great opportunity to take advantage of increased investor appetite,” said John Bye, a professor of finance at Northeastern University.
He said all the demand for corporate bonds is giving companies an excuse to hoard extra cash in case the economy takes a turn for the worse or to reinvest it back into their companies.
“You can use it for (research and development) purposes, or you may want to grow by building a new factory or manufacturing facility yourself or by acquiring another company,” Bai said.
Some of those choices are more helpful to the companies themselves than to the economy as a whole. But Nationwide chief economist Kathy Bojancic said increased corporate borrowing could have positive knock-on effects.
“When companies are optimistic and investing, they also tend to hire employees. So this could be a very positive sign,” Vostjancic said.
Furthermore, corporate bond yields are falling. Bostjancic said weaker companies could avoid having to make tough decisions if they could issue new bonds at lower interest rates.
“If these high interest costs are not brought down, you will need to find other ways to reduce expenses. Investment may be pulling back, but labor costs may also be reduced.”
In other words, increased sales of low-yield corporate bonds could help keep the labor market resilient.
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