While Short Term Rates Have Fallen, Corporate Bond Rates Are Up

The demand for corporate debt has plunged, forcing companies who want to raise debt money to either borrow from a bank or offer higher rates and other perks to potential investors.

The credit crunch has impacted the corporate bond market, making it difficult for corporatations to raise debt money.  Companies need to offer higher rates and other provisions to attract buyers.

Bloomberg says:

"In the current rate environment, nobody really wants to stick their neck out,'' Calastri, 51, said. He's one of more than 60 treasurers forced to wait months, reduce borrowings or accept less favorable terms as the turmoil that began a year ago stifles investor demand.

Issuers are paying about the highest borrowing costs since the last recession in 2001, according to Merrill Lynch & Co.'s U.S. Corporate & High Yield Master Index, as the lowest Federal funds rate in four years does little to pump up credit. The bond- market headwinds buffeting companies from Tyco to General Mills Inc. may thwart efforts by Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson to keep the economy out of recession with interest-rate cuts, stimulus checks and increased housing cash."

The spread between treasuries and corporate bonds can be as high as 200 basis points.  That means that corporate bonds have to pay 200 basis points (a 2% higher rate) more than what are considered super-safe treasuries in order for investors to be interested.  If you have  strong stomach and are open to risk, you might be able to pick up some decent returns.

It also shows the Fed only controls short term borrowing costs.  Even as the Fed has cut short term rates, long term rates to borrow have remained steady or increased.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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