NEW YORK – The Trump administration is ratcheting up its attack on Harvard University and higher education institutions, threatening the safest segment of the US corporate bond market.
Harvard, which has more than US$4 billion (S$5.25 billion) of taxable debt outstanding, and other prestigious schools make up the bulk of borrowers in the top-rated corporate bond index, joining tech giant Microsoft and multinational pharmaceutical company Johnson & Johnson.
While US colleges typically borrow in the tax-free municipal-bond market, the schools turned to the corporate space for quick and flexible cash as interest rates fell.
With massive endowments and legacies that span centuries, their debt has historically been considered as close to risk-free as possible and better rated than even the US government.
But that assumption is under attack.
On April 14, the Trump administration said it would halt more than US$2 billion of multi-year grants to Harvard, and is reviewing billions more after the school rejected its demands.
Columbia, Princeton, Northwestern and Cornell universities have also had federal funds frozen.
Even before the latest blow, investors had become more wary, requiring more compensation to hold the bonds and causing credit spreads to steadily widen over the past two months.
Harvard sold new debt in the middle of tariff-fuelled market volatility last week, with bonds maturing in 2036 pricing with a yield about 88 basis points more than the benchmark. That spread is nearly double what the school paid on a similar bond issued about a year ago.
On April 15, Harvard reiterated to investors that there could be material adverse effects from actions by the federal government.
It filed a supplement to bond documents associated with the sale last week.
“Further developments in these and other matters are likely, which may include but are not limited to legal actions such as audits, investigations, lawsuits, charges, or other proceedings,” the document said.
Schools that have pristine credit ratings include Harvard as well as its Ivy League counterparts Columbia, Yale and Princeton universities. Other elite institutions like Rice University and Stanford University also tout the top grades.
The colleges have long been “household names” that investors were proud of owning, said Abigail Urtz, a strategist for FHN Financial. Now, she said, there is more stigma given recent controversies, and that could be driving investors to sell the bonds.
Meanwhile, the schools are facing financial pressures, like the possibility of a higher endowment tax as well as federal funding cuts.
“There are risks seemingly lurking around every corner in the higher ed space,” she said.
Columbia’s bonds also widened. Debt due in 2035 traded at a spread as high as 97 basis points on April 9, up from 50 basis points before the election. The Trump administration announced it would cancel US$400 million of federal grants and contracts to the university in March.
In comparison, credit spreads on corporate-bond debt sold by the University of Notre Dame, another AAA rated college, have not widened in the same way. Notre Dame has largely avoided scrutiny by the Trump administration for its handling of student protests.
To be sure, credit spreads had widened in the corporate-bond market even before the volatility surrounding President Donald Trump’s tariffs. So higher education borrowers may also be getting dinged from that broader market dynamic.
Moody’s Ratings recently revised its outlook for the higher education sector to negative from stable, citing federal policy changes that “create a more difficult operating environment for colleges and universities”.
Analyst Emily Raimes said top schools’ endowments and reputation cushion them against the threats coming out of Washington.
“They have incredible liquidity to manage through periods of disruption or weakness,” she said.
And Jessica Wood, an analyst at S&P Global Ratings, said it would take significant costs – perhaps from multiple threats – for an elite school to get a credit rating downgrade.
“A higher endowment tax could have significant financial impact for some schools,” she said. “And then if you were to couple that with other federal funding pullbacks, that could be material.” BLOOMBERG
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