Taps Coogan – August 16th, 2023

Despite the considerable rise in interest rates over the past year, which had seen the benchmark yield on investment grade Corporate Bonds rise to over 5.5%, the pinch of higher interest rates is yet to be fully felt in Corporate America. As the following charts via Acemaxx Analytics highlight, corporates were largely successful in locking in low pre-inflation interest rates for the balance of this decade and, despite interest rates moving up considerably on new debt, limited new issuance has kept interest expenses low.

With nearly 50% of S&P 500 #debt not set to mature until after 2030, corporates and their earnings should remain largely insulated from higher interest rates for years to come, notes @GoldmanSachs pic.twitter.com/7IXgaTWuAB

— ACEMAXX ANALYTICS (@acemaxx) August 16, 2023

Despite a 10y UST yield of 4% and a US IG yield of 5.5%, S&P 500 income statements report an effective interest rate of just 3.3% on their #debt – chart @GoldmanSachs pic.twitter.com/U3b34O3Fh0

— ACEMAXX ANALYTICS (@acemaxx) August 16, 2023

This is the same general phenomenon we see with household mortages where, despite much higher APRs on new borrowings, the overwhelming majority of existing mortgages are still at relatively low rates (below money market rates) and the number of new mortages being issued remains low.

As we keep saying, the overall picture this paints is of a slower moving, longer term problem, for which the Global Financial Crisis – defined by huge amounts of mis-rated floating rate debt held by the soon-to-be-unemployed, is probably the wrong analogy.

Of course, it doesn’t take the failure of every part of the economy to kick off a recession. While refinancing and interest pressures remain collectively low, those pockets that do have financing needs will suffer and pose persistent ‘rolling recession’ risk from sector to sector as we have already seen with IPOs and unprofitable-tech since the start of 2022. We’ve been calling it purgatory and we expect to be here for a long time.