Tuesday, June 25, 2013

Impact of higher interest rates already being felt as companies and municipalities delay bond offerings

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.


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