A Wealth of Common Sense: The Companies Are Fine
2023 has seen inflation get crushed. That’s thanks to rising interest rates. The Federal Reserve made its most aggressive series of hikes in over 40 years to do so. However, when something moves that much that quickly, something could break.
We saw the cracks earlier this year as several banks failed. Fortunately, the issue was identified and a short-term plan was put in place. Outside of the banking sector, rising interest rates impact corporate borrowing.
When a company issued a corporate bond at a 5 percent interest rate, today’s higher rates may mean paying 10 percent for their capital or more.
That poses a danger for investors, as single-company credit risk could be on the rise. So far, companies appear to have managed their debt loads well.
Companies can use corporate debt in several ways. If it’s used to expand the business and grow faster, it’s beneficial in the long term.
Investors need to weigh what the debt being raised is being used for. A rising debt load an and of itself isn’t necessarily a bad thing.
So, should some fears pop up in the credit markets again, investors may have an opportunity to buy corporate bonds well under their par value. That can provide high current income, and the safety of a return on capital.