Companies that want to issue debt can likely expect a friendly environment for a couple years.
The Federal Reserve made the unprecedented move Tuesday of actually putting a time stamp on its “extended period” language on interest rates. Basically the Fed plans on keeping its fed funds rate low at least through 2013.
For treasurers, this means a continuation of the friendly environment to issue debt or otherwise get access to cheap funding on very friendly terms.
In its announcement, the Fed said that in order to “promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.“ The bad news of course is that Fed Open Market Committee, which sets rates, sees poor economic conditions at least through mid-2013.
But the low fed funds rate might add some positive sentiment to an otherwise muted end to the second quarter for corporate debt issuance. According to Fitch Ratings, new issuance remained strong overall in the second quarter at $198.2bn, Fitch said ($124.9bn high grade, $73.4bn high yield), with May generating more than 50 percent of the quarter’s activity. However for June, the sovereign debt crisis and weak economic data had a negative impact on overall volumes.
Although there have been signs of a issuance freeze – according to the Wall Street Journal, “market turmoil of recent days has effectively frozen banks’ efforts to syndicate corporate debt, particularly leveraged loans and high-yield bonds” – following the downgrade of US long-term debt by S&P, Tuesday’s Fed action might reinvigorate the market.