There has been a near doubling in the value of long term corporate bonds on issue in overseas markets since 2008, with Australian non financial corporations borrowing some $172 billion on world markets, RBA figuresshow.
„In a week, it’s a massive move,“ he said.
„Debt has been as cheap as it’s ever been. Companies,on average, have never theoretically been able toissue bondsat 3 per cent,“ Rundellsaid.
At thelow point inAugust, the average largeinvestment grade Australian company would have been charged$2.8million in interest everyyear if they were were raising $100 million worth of five year money from the bond market. Now, the annual interest bill for a company raising five year debthas lifted to about $3.5million.
Even so, it is still very cheap debt by historical standards. Indeed, new bonds issued today are likely to be replacing more expensive debt.
Rundellsays about $8billion in Australian dollar non bank corporate debt is due to mature next year,but at current prices, companies couldstill roll over this debt at prices lower than they were paying right now on bonds issued in previous years.
„What it might do is change where companies get their debt,“ he cheap jerseys said.
„Debt is probably still going to stay cheap,but I think thebest is probablybehind us.“
While higher credit costs may sound like a bad thing, it could also be a sign of brighter economic prospects ahead.
Most argue the latestjump in yields is occurringbecause investors arebetting Trump’s plan for an infrastructure spending spree and tax cuts will unleash inflation. If it is accompaniedbystronger economicgrowth, as investors are betting, itcould make wary corporate boards more likely to commit to large capital investments or acquisitions.
AMP Capital’s chief economist Shane Oliver says this expectation of slightly higherinflation could also helpcompanies raise prices more easily,offsettingsome of the crunch on theirprofitmargins.
He points out yields were rising in the early 2000s but this did not create problems for business because itcame amid astronger economic backdrop.
Banks areby far thebiggest issuers of non government bonds, raising about $100billion a year in domestic andoverseas markets, and they will also pass on any increases in their costs to customers with products linked to bond rates. Some lenders have already raised fixed rate mortgage rates recently, for example,and others are tipped to follow.
Outside the financial sector,those most likely tobeaffected by rising bond yields include the highlygearedinfrastructurebusinesses, utilities and real estate investment trusts http://www.cheapjerseys11.com/ (REITs).
Even so,ANZ interest rates strategistMartinWhettonsays companies with debt will have to think about strategies formanagingthe funding risk, and ultimately, any impact on their margins.
„Most around the world have not be prepared for this,“ he says.
„It’s significant enough that it’s now a factor in their thinking. It would not havebeen a few months ago.“.