Companies Can Borrow So Cheaply They’re Taking On Debt They Don’t Even Need

Companies Can Borrow So Cheaply They’re Taking On Debt They Don’t Even Need
Andrew Rummer

almost 3 years ago1 min

Mentioned in story

Companies in the US are loading up on debt even though – as the chart above shows – they’re sitting on record cash piles of nearly $2.4 trillion. 

US firms with an investment-grade credit rating find it so cheap to borrow in today’s markets they’re happy to sell billions of dollars worth of bonds – even if they often have no immediate plans for the money.

Apple, for example, has borrowed an additional $14 billion this year, even though it already has more than $200 billion of cash on hand. And on Monday ecommerce giant Amazon was reported to be planning its own massive bond issuance.

As the chart below shows, the extra amount it costs investment-grade companies to borrow versus what it costs the US government is the lowest in three years. Such firms can borrow for an average rate of just 2.1% – less than the current pace of US inflation, which means the debt should gradually reduce in real terms

Chart of US corporate yield spreads

Of course, this borrowing is exactly the type of behavior that rock-bottom interest rates are supposed to encourage. The question is: how will these firms spend their shiny new money? Plenty will use a chunk to buy back their own shares – helping bolster their stock price in the short term – but central bankers and politicians will surely be hoping they can find more productive ways to invest the cash over the longer term, helping the economy as a whole and creating new jobs.

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