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Rising Interest Rates to Affect Corporate Credit

Corporate credit growth during the first quarter of 2018 remained strong despite an uptick in rates. However, it is uncertain if businesses can continue to keep pace with growing interest rates during this economic expansion.

"Businesses appear to be taking the recent series of rate hikes by the FOMC [Federal Open Market Committee] and subsequent rise in the cost of credit in stride, with total nonfinancial corporate business credit rising 5.2% in Q1 year-over-year," according to a report from Wells Fargo Securities. "While corporate credit growth remains solid, businesses may be shifting financing types as they adjust to higher borrowing costs," continued Wells Fargo.

Wells Fargo reviewed debt financing and bond issuance in the report, and corporate debt is still "the largest component of debt financing, comprising roughly 60% of total credit market instruments on balance sheets in Q1." This is due to historic lows in corporate bond yields.

Unfortunately, if interest rates continue increasing, the cost of credit for short- and long-term debt may rise. Business investments are also likely to slow in the corporate sector in part due to a tightening credit market. Higher financing costs will equal a pullback in business investments, added Wells Fargo Securities.

-Michael Miller, managing editor

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Wednesday, 12 August 2020