Has the corporate bond rally gone too far?
Aug 09, 2012
The US government is not the only beneficiary of today’s ultra-low interest rates, notes Buttonwood on Economist.com. Multinationals are also cashing in. Consumer goods giant Unilever raised $1bn in the bond markets on 30 July in two tranches.
It will pay low interest rates of just 0.45% for three-year funds and 0.85% for five-year funds. Earlier, IBM raised ten-year funds at a rate of 1.875%. According to Dealogic, in the first half of 2012, European firms raised more cash from the bond markets than via bank loans, while nearly $584bn of bonds were sold in the US, up 6.5% on last year. “The Spanish and Italian governments can only dream of funding at such a low cost,” adds Buttonwood.
Unlike European governments, multinationals can move their operations so that revenues are less reliant on one economy. What’s more, corporates have boosted their balance sheets since the financial crisis, while governments have weakened theirs by spending. And with many European banks unable to offer attractive terms because their own financing costs have increased, the bond market is proving a popular alternative.
Yielding more than US Treasuries or bank deposit rates, corporate bonds appeal to investors too. The sector’s strong profile “allows people to sleep at night”, Edward Marrinan at RBS Securities told The Wall Street Journal. But there are fears that the bond rally “has gone too far”. If the US economy worsens and corporate balance sheets “deteriorate”, investors may yet beat a retreat.
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