Raising capital has been relatively easy – that is until last week when
Federal Reserve Chairman Ben Bernanke sent interest rates soaring with his
comments that outlined a plan to wind down the central bank's massive stimulus
program.
Referred to as quantitative easing and consisting of $85 billion a month
in bond purchases, the program was instrumental in a rally of risky assets
(namely stocks, bonds, and commodities),
and had driven interest rates to all-time record lows. But since Bernanke's
comments last week, the yield on the benchmark 10-year U.S. Treasury Bond has
shot up nearly 50 basis points, briefly touching a two-year high of 2.67
percent on Monday.
Prospective borrowers ranging from
U.S. companies to county governments on Monday shelved a raft of deals to raise
new capital or refinance debt as a suddenly uncertain interest rate environment
dented demand.
In the municipal bond market, half a dozen deals aimed at raising
collectively more than $300 million were postponed, while several companies
pulled plans to refinance syndicated bank loans. Corporate bonds,
meanwhile, have gone nearly a week with no deals brought to market, either in the
risky high-yield sector or the safer investment-grade sphere.
The impact of higher rates is upon us and it is hard to image the Fed
reversing course. This is an important time to be watching the actions of the
Federal Reserve Bank and the credit markets.