Corporate borrowers will likely continue to enjoy record low interest rates in the next few months as the Federal Reserve keeps selling Treasuries and the outstanding level of corporate bonds goes down.
Obviously, that's if the US economy avoids a double-dip recession.
Net issuance of Treasuries is predicted to rise by $1.2 trillion this year, while the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to a Bloomberg article quoting Jeffrey Rosenberg, a fixed-income analyst at Bank of America Merrill Lynch. Rosenberg added that investment-grade corporate debt will decline $132 billion this year.
As the pool of purchasable bonds diminishes, more investors will buy treasuries, pushing yields down and resulting in cheaper debt for corporations, too, since the rates they pay to borrow from the corporate bond market are driven to some extent by Treasury yields.
International Business Machines, for example, sold $1.5 billion of three-year notes with a coupon of 1 percent. Johnson & Johnson sold 10-year notes with a 2.95 percent coupon, which yield just 43 basis points over the comparable Treasury note.
In some cases, corporate may be perceived to pose less credit risk than the US, because of its long-term budget deficit.
"I wouldn't be surprised if someday Johnson & Johnson trades at a spread below Treasuries," Jack Ablin, chief investment officer at Harris Private Bank, told Fortune.
The picture isn't as rosy for junk-rated companies, but they are still able to raise debt at affordable rates despite growing uncertainty about the economy. That's because investors have so much cash on hand that they are willing to grab even risky bonds.
The high-yield market reached a record last week with $15.4 billion sold, according to Dealogic. For the year, there was $155.5 billion worth of high-yield bonds sold so far, on track to surpass the record of $163.57 billion set last year.
That's likely to change if the economy falls back into recession, and even companies with the highest ratings will start paying more. But even in the worse-case scenario, they likely have a couple of months left to enjoy rates that are surely near their bottom.