U.S. Companies Find Borrowing Conditions Improve as Markets Recover

Stay informed with free updates

Rising stock prices and falling debt premiums are making it easier for companies to access fresh cash, as an index of U.S. financial conditions returns to levels last seen before the Federal Reserve began raising interest rates more than two years ago.

The Chicago Federal Reserve’s national financial conditions index, which measures the ease for businesses to borrow money, reached its weakest level since January 2022 this month.

The reading comes even though the Federal Reserve has not yet begun cutting rates, which have remained in a range of 5.25 to 5.5 percent for the past 10 months, their highest level in 23 years. .

The index – in which lower numbers indicate loose conditions – has fallen as rising markets help ease the pressures of high rates on U.S. businesses.

At the beginning of the Federal Reserve’s tightening cycle in March 2022: “There was an expectation that these higher interest rates would have a larger impact overall on the economy,” said Wylie Tollette, chief investment officer at Franklin Templeton Investment Solutions. .

But it was now clear that the effects would be “very selective” and felt by companies with lower credit quality and higher levels of debt, rather than “broadly”, he added.

After weeks of fluctuations, investors are broadly betting that the U.S. central bank will cut rates once or twice by the end of this year. This has helped fuel a sharp rise in company stock valuations, while intense investor demand has narrowed the gap between US government and corporate borrowing costs, meaning it is now more attractive for companies borrow.

Wall Street’s S&P 500 index is up about 11 percent already in 2024. It hit a new all-time high this week after April’s consumer price inflation reading came in at 3.4 percent, down from 3.4 percent. .5 percent in March and ending four consecutive months. inflation above forecasts.

The numbers also pushed government bond yields lower as prices rose, reflecting growing expectations that the Federal Reserve will ease monetary policy this year.

Meanwhile, corporate bond spreads, or the premiums companies pay to borrow from the U.S. Treasury, are also hovering around multi-year lows.

But some investors warn that the easing of financial conditions – coupled with inflation data that is still well above the Federal Reserve’s 2 percent target – has made it less likely that the US central bank will cut interest rates.

“Right now, (the easing of financial conditions) is further evidence, at the very least, that the Fed should not cut rates,” said Robert Tipp, chief investment strategist at fund firm PGIM.

This is partly because loose financial conditions are an indication of the strength of the US economy. “Hopes for a soft (economic) landing are not exaggerated,” Tipp said. “This is an expansion that has shown tremendous resilience and that comes after rates went up and a regional banking crisis.”

Leave a Comment