The trend and reasons for American companies purchasing fixed-rate bonds

Author: Cypherium

Compiled by: ChainCatcher

Recent reports indicate that U.S. companies are highly inclined to purchase fixed-rate bonds. Since last year, the issuance rate of these fixed-rate bonds has increased by 12%, while the issuance of floating-rate bonds has decreased by 33%, a more significant drop. The reason lies in the borrowers' expectations of how the economy will respond as the world emerges from the COVID pandemic and begins to show some recovery. We expect this trend to continue into 2022 for the following reasons.

With the outbreak of the global crisis, the Federal Reserve lowered interest rates to just 0.25% and recently confirmed their intention to maintain rates at this level until inflation exceeds 2%. The goal is to encourage borrowing and expand spending, which should help boost the economy when it is most needed.

This has proven to be a beneficial move, but the world may now be showing early signs that the pandemic is coming to an end. Vaccines are starting to roll out, and the U.S. recently passed a $1.9 trillion stimulus plan aimed at increasing national employment over the next year. This is likely the reason investors are shifting towards fixed-rate rather than variable-rate bonds. If this stimulus plan is successful, it should promote job growth. As employment increases, it will also enhance the circulation of money, thereby increasing inflation. Ultimately, the Federal Reserve will be forced to raise interest rates again to offset this inflation, which will certainly impact the profitability of any floating-rate bonds.

This makes economic sense, but there is actually a second layer of reasoning for investors to engage in fixed-rate bonds now. You see, when applied to high-yield bonds, fixed rates are the most profitable, and typically the highest returns come from high-risk companies, which makes sense.

However, thanks to stimulus programs like the Paycheck Protection Program (PPP), small businesses have an additional safety net. This somewhat offsets the inherent risks of these types of bonds. Coupled with several months of fixed low rates, this makes the investment opportunity even more attractive.

It is possible that as we approach 2022, we will see the aforementioned inflation rise, and this opportunity will come to an end. Being able to predict this shift will certainly drive investment in these products, but it may not end as quickly as anticipated. On one hand, if further surges in COVID activity continue to harm the U.S. economy, the existing stimulus plans may still not be sufficient.

There is another way to keep inflation and interest rates low. Although it is unlikely before 2022, if the Federal Reserve provides assistance in the form of a new, government-backed central bank digital currency, it may limit the impact of inflation on the current dollar supply. This would assume that the new asset would be unique and independent, even if it is still considered currency. In this case, it might be possible to maintain near-zero interest rates without excessively driving up inflation. In summary, the U.S. is currently still in the research phase of CBDCs, so this is likely to not succeed at all.

In any case, it is clear that expectations for economic recovery are one of the main forces driving the trend towards fixed-rate bonds. Even if the timing of interest rate increases takes longer than expected, these bonds should still be a reliable investment. However, on average, the fact that companies are betting on a quick economic recovery is optimistic for the overall economic outlook.

Originally published at: https://www.nasdaq.com/articles/why-us-corporate-borrowing-is-surging-ahead-of-an-anticipated-economic-recovery-2021-03

Cypherium is a decentralized smart contract platform for creating and connecting dApps, CBDCs (central bank digital currencies), enterprise applications, and digital assets. We collaborate with industry-leading enterprises and government agencies and are one of the first blockchain companies to have real, tangible blockchain applications.