Weekly Buzz: 💰 Rate hikes haven’t stopped companies from raising capital

31 May 2024

You might think that the US Federal Reserve’s (the Fed’s) second-most aggressive rate-hiking cycle in history would have significantly increased the cost for companies to raise fresh cash. 

Instead, surging share prices and falling corporate bond yields have sent an index of US financial conditions to its lowest level since November 2021.

How companies are still raising capital

Interest rates aren’t the be-all and end-all of financial conditions. While it's true that higher rates generally mean pricier loans, many other factors affect how difficult it is for firms to get financing and keep the economic engine running.

This includes the cost for companies to borrow cash compared to governments (known as credit spreads – more on this in our Simply Finance below) and how well the stock market is doing, which serves as another source of financing.

Enter the National Financial Conditions Index (NFCI), which measures how easily companies can raise cash, taking into account more than 100 indicators across money, debt, and stock markets. A rising value indicates tightening financial conditions, while a decline signals easing conditions. The index decreased to -0.56 in May – its lowest level in two and a half years.

You’ll also see that financial conditions tightened in 2022 and 2023 as the Fed hiked interest rates, which comes as no surprise. Even then, the index remained in negative territory. In other words, financial conditions were still looser than average despite surging borrowing costs. 

What’s the takeaway here?

Interest rates are just one piece of the puzzle when it comes to keeping the economy moving. Despite ‘higher-for-longer’ rates, companies can still find other ways to raise capital. This means that they don’t necessarily have to cut back on their investment, which keeps the economy growing.

As an investor, it’s important to stay up-to-date with the oftentimes complex global economy. It’s why we designed ERAA®, our investing framework, to take into account a wide range of economic data, optimising asset allocations to keep risk constant across broader macroeconomic cycles.

📰 In Other News: Japan’s 10-year bond yield is at an 11-year high

Japan’s 10-year bond offered investors something unusual last week: a yield above 1%. The yield on the benchmark government note hit its highest level in 11 years, as traders braced for higher interest rates after a historic change in tune from the country’s central bank. This would have been unlikely just months ago, when the country’s now-scrapped yield curve control program explicitly capped long-term bond yields.

With Japan’s inflation rate staying at or above the central bank’s 2% target for a 25th consecutive month in April, traders have been increasingly betting that there could be further increases to borrowing costs this year.

What’s more, the central bank is under increasing pressure to raise interest rates in response to the yen falling to a 34-year low, despite efforts to bolster it with huge yen-buying interventions in the currency market.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Credit spread

Just like how you might pay a higher interest rate on a loan if you have a lower credit score, companies have to pay more to borrow money compared to governments, which are seen as safer bets. The difference between what companies and governments pay is called the credit spread.

During periods of economic uncertainty, credit spreads tend to widen as investors become more risk-averse, demanding higher returns for lending to companies.

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