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Higher rates only affects new issuances of bonds, rolling over of existing debt, or bank loans (which are a small fraction of the total debt market in developed
by smallnamespace 9y ago
Higher rates only affects new issuances of bonds, rolling over of existing debt, or bank loans (which are a small fraction of the total debt market in developed economies).
The average maturity of a corporate bond is now 15+ years, and most bonds pay a fixed interest rate that doesn't vary due to current rates [1].
That means that any change to rates will not have much of an immediate impact on the interest expense line item. On the other hand, it will actually increase the interest income they receive on their cash balances.
[1] https://www.ft.com/content/41213b02-b87e-11e6-ba85-95d1533d9a62 https://www.ft.com/content/41213b02-b87e-11e6-ba85-95d1533d9...
- soVeryTired 9y agoYou think rolling over of debt and new issuance is less important than interest income?
- smallnamespace 9y agoNo, but the 15+ year plus maturity of existing debt stock means that on average, borrowers won't need to go back to the capital markets any time soon. Slightly oversimplified way to think about it: every year companies need to refi only 1/T of their debt, where T is the average maturity.
- Symmetry 9y agoNot to necessarily agree with the OP's prognosis, but the Fed rate also affects inflation which can affect the viability of every contract written in terms of dollars when it strays from where it's expected to be.