Markets & Stocks
Girding for a rise in rates
Companies are busy issuing corporate bonds -- a sign they believe higher interest rates are coming.
December 9, 2003: 12:23 PM EST
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - The word on Wall Street may be that the Federal Reserve won't be hiking rates for a "considerable period," but it doesn't look like U.S. companies are taking any chances.

Corporations have been flooding the market with debt in recent weeks, anxious that an improving economy will send borrowing costs higher. Where issuance typically grinds to a halt by Thanksgiving, this year the debt deals have kept on coming. Last week saw $10.7 billion worth of new investment grade bonds, according to CreditSights, as companies like CIT Group and Alcan moved to lock in low rates. Procter & Gamble, Harrah's and Raytheon are among the companies hoping to push out new debt before the door shuts on 2003.

"Normally, you wouldn't see this kind of issuance into the second week of November," said Banc One Capital Markets head of investment grade research Dave Novosel.

This all comes on top of the $40 billion in investment-grade bonds issued in November and $38 billion issued in October.

The rush to issue matters because companies -- directly involved in selling, setting prices and hiring -- often have an early read on what's going on in the economy. Some firms, like Bristol-Myers (which sold $1 billion in long-term bonds in late September) have gained reputations of being particularly prescient on where interest rates are headed.

"Corporations start issuing debt when they see an improvement in the economy," said D.A. Davidson bond trader Mary Ann Hurley. "That generally means they're seeing more demand."

Is it different this time?

Hurley isn't certain that the raft of debt getting issued is quite the signal that it was in the past, however. Excess production capacity, she said, means that even strong economic growth won't be enough to give companies pricing power, or meaningfully raise employment levels. As a result, Fed rate hikes are going to be out of the picture for some time yet.

Moreover, pointed out MS Howell chief market strategist Brian Reynolds, many companies may be issuing bonds not because of opportunism but because they must. Much of the corporate debt that got issued during late 1990s is now maturing and getting rolled into new debt.

Investor concern has also led big companies to wean themselves from heavy reliance on the commercial paper market, forcing them to issue bonds to meet their financing needs. General Electric, for instance, has dropped its short-term liabilities by more than $10 billion this year while increasing its longer-term borrowings by over $20 billion.

Company Debt
Written by: Justin Lahart

Because so much of the corporate issuance is going toward rolling over debt and shoring up balance sheets, little of the money raised will be earmarked for new projects, points out Miller Tabak bond strategist Tony Crescenzi. But that doesn't mean that the issuance doesn't mean companies don't see higher rates on the horizon.

"It's a sign that the treasurers of these companies see this as a great opportunity to refinance," he said. "They recognize that rates may not get better."  Top of page

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