Even though the Federal Reserve is continuing to hold interest rates steady, rates on long-term government debt have been rising ever since President Donald Trump started a war against Iran.
That’s partly because investors are worried about all of the inflation the war’s causing. And partly because the war is adding to an already-enormous pile of government debt.
Either way, those higher Treasury yields are affecting mortgage rates, auto loan rates, rates on credit cards, and the yield that big corporations pay on the bonds they issue.
Thing is, a lot of corporations have been going ahead and borrowing anyway — despite those higher rates.
Corporate bonds tend to pay higher yields than government bonds because, in theory, corporate debt is riskier.
When the war started, corporate bond yields rose. “Not massively, but enough to make a measurable difference,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
He said that’s partly because bond markets were slightly more worried about risk due to the war. But another reason is corporations have actually been issuing a lot of bonds this year.
“So if there’s a lot of corporate bonds being issued, their yields move up higher than government bond yields might move,” LeBas said.
When companies dump a boatload of new bonds into the market, they have to pay more interest to attract borrowers.
And LeBas said companies have been issuing record amounts of corporate debt this year, in large part to finance artificial intelligence projects.
Even though interest rates have risen, he said those companies are going to keep issuing debt because they think those projects are going to generate huge returns in the long run.
“Whether you’re borrowing money at five, or five-and-a-quarter percent, to finance those long run returns, it doesn’t have a huge effect,” he said.
There’s also a lot of demand for corporate debt, because the economy and corporate profits are in pretty good shape, said Drew Pascarella, a finance professor at Cornell University.
“The direct question that is on the mind of a lender, am I going to get paid back, the answer seems to be pretty positive here, notwithstanding the backdrop of the war,” he said.
But another reason why companies are issuing debt is because they think rates could rise more in the future, said Cooper Howard at Charles Schwab, a Marketplace underwriter.
“So that’s one of the other reasons why you’re seeing issuers come to the market now, is to remove some of that uncertainty,” he said.
Interest rates could rise further if inflation keeps picking up and if the war drags on.
“If gas prices remain elevated for an extended period of time, that begins to choke off lower-income consumers, and begins to constrain growth going forward,” he said.
Howard said a slower economy with less spending makes corporate bonds seem riskier.