Corporate issuance further pressures longer-term Treasury yields, amid expectations of bad inflation “surprises.” Share buybacks getting a lot more expensive, but no problem either.
By Wolf Richter for WOLF STREET.
Why would corporate giants suddenly pile into the corporate bond market with large-scale new issuance in September at these high interest rates? Why not wait for that Fed pivot and rate cuts that must be coming any moment, no?
Because they want to lock in these interest rates that they can still get, before rates rise even further. These companies are not betting on rate cuts. A year ago, they bet on rate cuts that didn’t come. Now they bet on higher for longer – on higher inflation and higher long-term interest rates for longer – and they’re issuing bonds at a red-hot pace in September before rates go even higher.
Today’s shining example is T-Mobile US [TMUS] which announced that its wholly-owned subsidiary T-Mobile USA, plans to sell a pile of new debt, with the amounts and rates still left blank in the filing. According to sources cited by Bloomberg, the senior unsecured notes would amount to $2 billion, including unsecured senior notes with 10-year and 30-year terms.
The 30-year notes, due in 2054, are expected to price at about 1.63 percentage points above Treasury securities, according to Bloomberg, citing sources familiar with the deal. A spread of 1.63 percentage points would price the bonds at a yield of around 6%!
A survey of investment bankers who underwrite corporate debt sales forecast $120 billion of US debt to be issued in September, according to Bloomberg.
That would be about 34% higher than in September 2022, when $89 billion in investment grade debt was issued, according to SIFMA (Securities Industry and Financial Markets Association).
Today’s 10-year Treasury yield, at 4.30%, is a full percentage point higher than last year’s at this time. But it’s at these much higher yields this September that debt issuance is taking off.
On Tuesday after the Labor Day weekend, at least 20 investment-grade companies sold over $36 billion in new debt in the US, the biggest day this year, ahead of May 16 ($33 billion) and January 3 ($34 billion), according to Bloomberg.
Companies that issued bonds in the US after Labor Day included big deals by BHP Billiton with $4.75 billion of senior unsecured notes in a five-part deal, including 30-year notes; and Philip Morris International with $2.35 billion of senior unsecured notes, whose longest-dated portion were 10-year notes.
And in September 2022, there was hesitation by companies in issuing new debt as everyone was waiting for the Fed to slash rates again. Today, this scenario appears to be on the back burner, and companies are locking in the rates they can get now for the long term, including for 30 years.
“I would expect companies to be trying to get ahead of any economic data that sends US Treasury yields higher,” Winnie Cisar, global head of credit strategy at CreditSights, told Bloomberg. “I think we will see a front-loaded issuance month.”
All eyes are on the upcoming CPI report on Wednesday, and everyone knows it’s going to be a bad “surprise,” with more bad inflation surprises to be followed later in the year. We’ve outlined these coming second-half “surprises” back in August and in July: The base effect, energy prices that bounced off the steep plunge, and the end of the ridiculous 12-month-long adjustments to health insurance CPI, in addition to other elements that add heat to the inflation numbers. And the core services PCE price index, which the Fed keeps a close eye on, has already shot higher. Those inflation “surprises” could drive Treasury yields higher.
So now is a good time to sell lots of debt to front-run the risk of even higher rates later? Even if the Fed maintains its short-term policy rates, long-term yields will be under pressure from the tsunami of issuance by the Treasury Department, the pileup of corporate bond issuance, and this scenario that inflation and long-term yields will be higher for much longer.
T-Mobile joined the crowd, locking in the current rates before they go even higher. The company had $6.6 billion in cash at the end of June, and $76 billion in short and long-term debt.
Moody’s today rated the unsecured notes Baa2, which is in the lower segment of investment grade, two notches above junk (my cheat sheet of corporate bond credit ratings).
Fitch today rated the notes BBB+, three notches above junk, and expects EBITDA (earnings before interest, taxes, depreciation, and amortization) – a measure of cash flow – to increase “to more than $30 billion by 2024 which offsets increased debt due to spectrum acquisitions and share repurchases.”
The company said in the filing that it intends to use the net proceeds from the debt sale “for general corporate purposes, which may include among other things, share repurchases, any dividends declared by Parent’s Board of Directors, and refinancing of existing indebtedness on an ongoing basis.” It’s also expanding its 5G network.
In July last year, T-Mobile, which had long been junk-rated, was anointed with a first investment-grade rating, and by August all three major US ratings agencies rated it investment grade, and has been upgraded since then. In terms of taking on debt, the investment-grade rating was manna from heaven.
The company is a relative newcomer to share buybacks, but now as an investment-grade company, it’s massively into it. It started in Q3 2022. Over the past four quarters through Q2, 2023, T-Mobile blew $11.2 billion in cash on share buybacks. In September 2022, the company had authorized $14 billion in share repurchases through Q4, 2023. Last week it announced an additional $19 billion in a “shareholder return program,” including dividends. And this program could reach up to $60 billion, depending on additional authorizations by 2025.
And now it’s borrowing at rates at up to 6% to buy back its own shares. This follows a pile of debt issuances in May, when it sold $3.5 billion in new debt. A $1.25 billion portion of this debt were 30-year notes, due in 2054, that were priced at a yield of 5.75%. Rising interest rates no problem.
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The equity party must go on at all cost. How else are insiders going to get their chalet in the hamptons? By Shrinking the float ’beating expectations’ becomes an afterthought and stock prices skyrocket. What a gig.
The debt to fund this charade simply gets kicked way down the road, again and again. Been there seen that. No wonder the ‘green shoots’ are sprouting again. Oh glee.
absolutely! “Stock buybacks” is also code for related party transactions between the Company and it’s top C-Suite management. Elon musk provides the example per the WSJ article last week…he borrowed against his shares from Tesla for unknown reasons.
Publicly traded corps are also like their own central banks QE/QT.
Musk borrowing against his shares could be a real issue. If anyone noticed, the Morgan Stanley analyst just pumped Tesla shares on the revenue potential for the autonomous network, which is nowhere near reality. This is at the same time demand for Tesla vehicles is starting to wane and the company doesnt have alot of room to cut prices without destroying the last bit of gross margin.
I’m not saying Tesla is a terrible company, just a terrible investment at this point.
Tesla stock will drop 50% and Musk maybe wants to lock in some cash to play with at these high prices.
If Musk wanted to lock in, he would sell equity, not borrow money against equity.
He obviously thunks Tesla prices will continue to increase.
Fast forward two years and same geniuses will be issuing new shares after stock collapsed to record lows.
funny how $100 oil will scare inflation folks
Because oil is in everything you touch. Either directly or as a means to get it to you. Our entire global economy is reliant on cheap energy that can easily be transported and deployed. If oil vanished, we wouldn’t have enough resources to replace it in the materials we use.
Andy-
“Fast forward two years…”
…and options and stock grants will be modified/reissued in order to shield c-suite wealth from the stock price decline. At least, that’s how they did it at my company over the years.
At companies that do this repeatedly, the mass of outside (non c-suite) shareholders clandestinely subsidizes hidden executive pay. Proxies reveal some of this, but not enough, and very cryptic.
Which is already a forgone conclusion today.
Whenever I’m confused, I just imagine what would benefit the ultra wealthy and then suddenly, it all makes sense!
This! ^
I just noticed yesterday that on the Fidelity Investments “Fixed income, Bonds and CDs” page, they have corporate (Baa2/BBB) 1 year bonds paying 7.17%
Here are the yields for 3mo, 6mo, 9mo, 1yr
Corporate (Baa/BBB) 6.16% 6.35% 6.32% 7.17%
How risky is something like this?
If you have to ask, stay away.
If you’re asking an internet forum how risky Baa/BBB bonds are, maybe best to stick with treasuries.
One step above junk bonds. So be careful, do your homework, and diversify. Also be aware that if your bond matures and you are paid in full but the company declares bankruptcy shortly after you are paid you may have to return the principal and interest to the bankruptcy estate and then get in line to be paid with other unsecured creditors. Caveat emptor.
Credit ratings are an awesome indicator of credit risk. SVB and First Republic collapsed with A ratings.
https://wolfstreet.com/2023/03/11/svb-financial-had-investment-grade-credit-ratings-from-moodys-and-sp-up-to-collapse-then-ratings-got-slashed-in-one-fell-swoop-to-default/
So you really have to do your own research. I don’t mind holding BBB-paper, but I want to understand the company well before I buy the bonds. Bond prices can plunge when problems suddenly crop up. With one year remaining before maturity, the risk of a catastrophic surprise is relatively small, but it’s there.
Also, I still think spreads of Treasuries to BBB are too narrow, and they have narrowed further in recent months. Personally, I would like to see wider spreads before I get excited about buying BBB-paper. At the current spread, I don’t feel like I’m adequately compensated for taking that credit risk.
Yes, wait until they have to compete with all the treasury issuance.
Who would buy this crap? Reading and listen to you helped me climb out of debt and afford steaks for dinner tonight! I read unsecured 10 & 30 year notes and 6 billion in cash and 76 billion in debt? Yahoo chart says their assets doubled from 2019 to 2022 but that has to be just on paper. What am I missing? Wouldn’t it be better to gamble at Vegas then buy these notes? Thanks Mr Wolf!
Every investor who relies on their coupon payment, but just had an older bond issued during The Great Repression (I can’t be the first to call it that, but if it hasn’t been trademarked, consider that a gift Wolf) mature, for one. Also, every 401k participant in the country, thru the bond mutual funds in their plan, for another. The big fund companies receive piles of cash every week from the 401ks they’ve paid to shelve their products, and they have to put it somewhere.
Great Repression®
🤣😍
Agree re spreads. Overall credit ratings are fairly useful Harvey, not perfect, and a lot more useful when buying a diversified basket (if you buy 20 random BBB situations you kind of know what to expect vs 20 random CCC situations).
$HYIOAS just keeps falling.
Big mistake some of the Quadrant guys made and missed the bull market.
I think Verdad got it right but they are on the quiet side. The ones who got it wrong are not.
Wolf, just out of curiosity, do you access current credit default swap pricing, and if you do where can this be found at a reasonable pricing?
Back in the day, I used markit, and I found it to be most accurate and current, and very helpful with up to date bond pricing…
The insurance guys just seemed to be more real-time than s and p, moodies, or fitch imo.
I’m more than a little confused. Higher interest rates supposedly means the cost of cash has increased, or is expected to. I thought we were drowning in cash. So it’s more expensive? Something doesn’t make sense. My guess is that it’s what cash is buying that has become more expensive. Or inflated, I suppose. So what’s inflated? Not cash. There’s too much of it, right?
“…means the cost of cash has increased,”
For asset/cash holders, it means that the return on “cash” (= low-risk short-term investments/loans has increased) and is sort of normalizing, after years of interest-rate repression by the Fed.
For borrowers, it means that the cost of borrowing short-term (and long-term too) has increased and is normalizing.
Short-term rates no longer have anything to do with supply and demand; they’re governed by the Fed’s five policy rates, including on repos and reverse repos which bracket the yields in the $5-trillion a day repo market, which is a huge factor in the credit markets.
Given that every creditor, lender and investor decision is based at least to some degree on current short-term rates, how can the price fixing you refer to (5 policy tools) NOT lead to:
A. Bad financial decisions and repeating crises
B. Government spending gone off the rails
C. An eventual period(s) of severe dollar devaluation (purchasing power)?
And to think Argentina is considering linking to the paper dollar!
With all it’s warts (and recognizing I’ll get pilloried for suggesting it), the period of the gold standard was more stable than the present, conflicted, government-manipulated system.
That’s my 2 cents worth ($0.0002 in 1913 dollars, if my math is close).
NAH John H:
It wasn’t any more ”stable” on gold standard.
the reason the bankster class insisted on the FRB was that the LOLs, (little ol ladies of all ages and genders, etc.) ,,, or at least the smarter ones,,, put their gold into jars in the backyard in the good times,,, then took out the gold and bought the assets of the banksters, etc., for pennies on the dollars in the crashes…
Certainly, all reasonable people can see that the oligarchy, some of whom were part and parcel of the bankster class could not have that, eh???
So the FRB was installed to save the oligarchs/banksters,,,
As always, at the expense of WE the PEONs.
CLARO?
VVNV-
If I understand you correctly, the LOL’s would withdraw “money” (i.e. gold) from the bank system in times of plenty, and redeposit after the air had rushed out of the balloon?
Makes sense. That self-regulated the euphoria with occasional panics, I suppose. Those wiped out for lack of foresight made room for the next set of projectors. From what I’ve read the panics were severe, but mercifully short, for the most part.
I should not have used the evil word: “stability.” To stabilize via government policy, however good-intentioned initially, brings with it the likelihood of wrong actions, unintended consequences, and corruption.
What I should have said was that the hard currency system was more “sustainable” than the current system, which relies on ever-growing debt in its attempt to stabilize the economic experience for all parties through all situations.
“There be dragons” as the old maps used to say…
Thanks for you thoughtful comment.
I wonder if the deluge of bond issuance is based on a belief that those spreads will widen?
It is my assumption that credit spreads would widen in a stagflation environment, as the rough economy would increase risk of default and the inflation would prevent alot of government stimulus.
Is stagflation the worse case scenario for the stock market? A lack of demand and a Fed on the sidelines because they cant risk higher inflation?
So, now, would you like being a stockholder of such a company? Shell game. Stockholders need to vote in a conversion of their holdings and to a higher class due to their longer holdings of investment (FIFO). Ultimately this will lead to bankruptcy and oligarchical corruption of the order of the worst states of the USSR.
Paul Volcker apparently inherited all the brains. By raising rates significantly above the rate of inflation, he killed inflation for 40 years. Now recent money-printing was different than what was done in his day to screw things up, but it certainly seems these Feds lack the testosterone-producing parts old Paul had.
The Technology Revolution which supplanted the Industrial Revolution also started around the same time. This had a hand in keeping inflation in check until the Fed found the secret sauce to opening the inflation box…
Technology and globalization kept prices in check, but Volcker got it right.
Volcker screwed it up at first, just like his predecessor. He raised, eased off, inflation roared back. He got pissed and brought down the hammer.
It worked. Burns gets remembered as the fall guy, Volcker the hero.
Who gets to be the hero this time? Powell gets his wish. He becomes Volcker.
The game, sir, is up.
👍
Volcker was not just a puppet of wealthy people. People like to bash Jimmy Carter, but he might have been the one president who would go against corporate interests (for example his was the only presidency under which oil consumption actually decreased). He should get real credit for hiring Volcker.
And although I am a fiscal conservative, I think Reagan was our worse president because he fired Volcker so Wall Street could merge banking and investment banking. Reagan also convinced conservatives that deficits dont matter. The destruction of the conservative economic core in this country has led to all the rest of the economic problems.
But I have to admit Reagan played the part of President beautifully!
Lest we forget the systematic elimination of the blue collar middle class. Thanks Ron.
I keep a spreadsheet on my desktop which indexes fred data for hourly earnings, and productivity to Jan 1970. Very interesting how productivity and hourly earnings diverge in ~1984, and not to the benefit of the working man.
I’ve seen longer term charts that show this divergence beginning earlier in the ’70s, and then start really escalating in 1980
Reagan reappointed Volcker for a second term in 1983. Volcker did not seek a third term in 1987. Reagan did not fire him. Get your facts straight.
Ummm, Volker wasn’t fired, he didn’t run for a third term.
Oil consumption went down during the Carter administration because inflation was out of control, gas prices had increased literally 10 fold between 1970 and 1979, the Iran hostage crisis in 79 and an OPEC price hike in 79 broke the back of the economy, and we had a recession, and starting in about 73, literally everyone was shopping for cars that used less gas. Carter didn’t have much of anything to do with that except wearing a cardigan and giving a much panned speech.
“The company said in the filing that it intends to use the net proceeds from the debt sale “for general corporate purposes, which may include among other things, share repurchases, any dividends declared by Parent’s Board of Directors, and refinancing of existing indebtedness on an ongoing basis.” It’s also expanding its 5G network.”
Yeah, no. All good here, mate.
Is it getting kind of smoky around here? Just rolling over debt into higher interest payments while still stripping the company cash for share repurchases and that qualifies as investment grade.
Yep, that would be illegal in Australia.
Our prisons are full, that’s why it’s legal here.
Music to my ears! I have some Sprint bonds that mature on Friday, so it looks like some of this cash will be coming my way…
Good article.
Hardly anyone it talking about what if inflation keeps going up and so do interest rates.
What if mortgages go to 8%. It could happen. People who bought new houses this year from the home builders and were able to lock in a 5.5% could be the next locked-in home owners. LOL
Mortgages are just a shade shy of 8% already. From Bankrate: On Monday, September 11, 2023, the current average 30-year fixed mortgage interest rate is 7.56%…
give it a few weeks and you’ll see 8% regularly….
This seems more and more likely. If wolf is right, and I think he is, 5.5% will look great in a couple of years.
The real question is where do prices go.
I’m still in Money Market at around 5%.
I don’t love the idea of unsecured, almost junk, debt for only 1.6% more.
Prices of houses will continue to fall just as they are now doing.
I’m starting to regret not being American and living in the US
They have been doing quite literally the opposite of falling for months now. They’re almost back to the peak prices of 2022 nationally.
Agree, the premium for junk debt is way too low, these highly leveraged companies are going to sink if rates stay higher until 2025.
This is by design. A frozen resale market benefits the homebuilders who want to skim the market as long as possible.
Huh? It is already nearly putting them out of business.
Resales compete with builders. Unrealistic homeowners unwilling to price correctly benefit builders willing to make deals.
Why is the Fed not selling MBS? Why is nobody talking about it? Why doesn’t anybody ask Powell about it?
And question number 2 for Powell, why were you buying MBS in 2021 when home prices rocketed up 30%?
This issuance of corporate debt is actually a good thing. There is a huge excess of private equity “liquidity” chasing too few goods; just like Jerome Powell says a better balance of supply to demand must be achieved. Ideally once all the money ends up in these corporate bonds, a ruling that corporate bonds are securities would keep that excess private liquidity “frozen” in those companies for the duration of the loans. A big demand to loan money for stock buybacks would be good to pump up stock prices for 401k and drive up the interest rate helping Powell all the more. The problem has been the demand to buy Federal Reserve debt that excessively lowers the interest rate (the QE disaster), but demand to borrow should push up the interest rates; a win-win for us all.
Huh? There is no such thing as ‘Federal Reserve debt.’
Raise the minimum wage to $20 per hour.
Issue a gazillion new shares while doing buy backs.
Stimulus checks for all.
Raise rates…expand debt.
When the cost of the new minimum wage hits the corporate ledger, create a crisis.
Remember the Bronco II?
Coming soon to a Ford dealer…the Bronco $200K!
Old Broncos are pushing that $ already.
Wow great article and I would personally avoid T-Mo Debt. You are buying the 5G Network that I believe will BK copper wired companies like Comcast that failed to move into the new technology.
What on earth are you talking about?
All debt will be inflated away. There is no other option. Obviously companies can see that going back to low interest rates anytime soon is not going to happen.
Obviously not, and it debt just grows more burdensome with higher interest rates as Evergrande and many other have discovered.
Any company that borrows money for 30 years at these interest rates to buy back their own stock is stupid beyond believe. I wouldn’t invest in any company that did this. In addition, I wouldn’t even buy their products or services
That’s like entire 50% of S&P500. All 5 of them.
Well most do not know nor care when buying products and services from these companies. Not much problem there.
To buy this debt is a different matter, buyers should do their research.
To the companies directors, no problem. Take the money when available, move on if it go bust.
“borrows money for 30 years at these interest rates to buy back their own stock ….”
The board, who is full of stock options, votes to borrow and buy back their shares to jack the price, kick in the stock options….then they depart.
This has been going on in corporate america ever since the feds allowed buybacks. It’s money printing 01 ala the Fed.
It’s worse than people who bought shares in 1929 just before the epic crash. Today the stock market is even more overvalued than back then. I guess they want to go out in a blaze of glory with those share buybacks.
The “inversion” of the yield curve was manipulated by an errant and devious monetary policy…….fueled by the unprecedented entry into the long end by the Fed.
Borrowing long term, and well under the inflation rate for that era was a gift….funded by the unrealized losses of the Fed’s portfolio.
A positive yield curve is what reality should look like, not what the Fed painted for years.
The Federal Reserve didn’t, but the US Treasuries markets did.
Are these bonds callable?
My understanding is that they’re not. If bonds are callable, it’s always noted since this is a fairly rare and disliked feature that the company has to pay for with a higher yield. Amazon issues long-term callable debt. But that’s a fairly rare exception.
I think TMUS bonds will be callable as their current bonds can be called.
Take a look at
CUSIP: 87264ABB0 3.5% 04/15/2025 Make Whole Call
CUSIP: 87264ABZ7 1.5% 02/15/2026 Make Whole Call
others…
Make Whole Call requires issuer to pay NPV of all future coupons in addition to par, unlike a traditional call. As rates fall NPV goes up so not really that beneficial to issuer.
Maybe SO, Maybe NO Wolf:
Been looking at ALL, repeat ALL the FINE PRINT on some ”recent” CDs and it certainly appears to this old and now retired analyst of billions of dollars of construction contracts/requests for bids, etc., that
ALL of such financial instruments actually DO HAVE languages that may or might be adjudicated to allow the issuer to recall them under certain circumstances.
Thanks again for your continuing reporting and support…
Callable CDs can be called; and non-callable CDs cannot be called. Whether a CD is callable or non-callable is clearly stated. When the bank collapses, that CD contract is no longer worth the paper it’s printed on. The only thing that matters at that point is FDIC insurance. The banks is taken over by the FDIC, and the FDIC insures the CD, and the insurance kicks in, and the insurance can take the form of either transferring the CD to another bank, in which case, for you, there is no change; or it can take the form of paying you the face value of the CD.
“Callable” means the bank or the bond issuer can “force” the holder to sell the CD/bond back to the company at either a pre-determined price, such as face value, or at a make-whole price based on a formula, under various conditions at various dates, and those conditions and dates are spelled out in the contract.
The issue with this T-Mobile bond is that we don’t know for sure because, at the time of the writing, the bond deal hadn’t been finalized and sold yet, and not enough details were made public. Even the final pricing was still being negotiated, and the info here was based on sources by Bloomberg reporting on the pricing negotiations. There was nothing about this bond being callable in the filing by the company, in the press release by the company, in the Bloomberg story, and in the ratings reports by Moody’s and Fitch. So the assumption is that it is non-callable since no one mentioned it. But this is not firm. We don’t know for sure until we see the actual bond when it’s sold. That lack of detailed info about a still unfinished bond deal is the problem here.
There are times when a bond issuer “wants” to buy back a non-callable bond. In that case, the company has to make an offer at a premium that sellers consider a better deal than holding the bond, and this is expensive for the company, and it “cannot force” holders to sell back the bonds. They have to be entice by the premium. Then there are also debt exchanges, such as to avert bankruptcy, and bondholders don’t have to go along with them, and those debt exchanges are considered a form of default. The scenario might be that a nearly bankrupt company offers new bonds in exchange of the old bonds, for example at 50 cents on the dollar, thereby cutting its own debt and having a chance to survive, and ultimately the new bonds might be worth more than the old bonds would be in a bankruptcy. But bondholders get to decide. When a bond is “callable.” There is nothing to decide for bondholders. They’re forced to go along.
For those in higher tax brackets, are the tax free municipal bonds issuances doing the same thing?
Last I saw, 10 year G.O. AAA muni spread to treasury was about 70%, so roughly moving hand in hand…
(And perhaps muni quality is on the wane? But so is Treasury quality…)
It certainly looks like rates are going up. So locking in a rate now is a good move. If rates go down, refi.
The only thing that can stop inflation in the immediate term is how well the administration plays the COVID card. That could reverse energy prices.
“If rates go down, refi.”
Works for a mortgage. Not so much for a corporate issuer. They’d have to buy up their debt in the market, which is pretty damn illiquid. Not much would be offered up. And it would be reallllly expensive and defeating the whole point to do that. No refi option available. You live with your financing decisions.
They can make whole calls.
“It certainly looks like rates are going up. So locking in a rate now is a good move. If rates go down, refi.”
That is a good move in most cases.
3 friends became trapped in 2009. They had a 6% mortgage rate but their house price fell in value such that they were underwater. When rates fell to below 4%, they could not refi without paying off their existing loan with more cash to qualify for the refi.
They were trapped with a 6% rate for 7 years. They just continued to pay 6% until the house value recovered in 2016. Then they refi’d and are doing very well now.
As long as house values don’t drop too much. 20%? This is a good plan.
MW: $7.6 trillion of publicly held U.S. government debt matures in next 12 months. What does the Treasury do next?
Half of that are T-bills (1 month to 1 year).
MW: U.S. budget deficit will double this year to $2 trillion, excluding student loans, CBO says
Hint: higher for longer means more labor STRIKES too! Our new normal.
kiers – am old enough to remember strikes being perfectly normal (…losing sight of how one got to the current dance usually results in ‘…everything old is new again…’).
may we all find a better day.
First of all, the Fed is NOT going to raise interest rates substantially from here, if at all. The economy is slowing through demand destruction. It will take time but it is happening. As far as inflation, they are letting it run its course. Will you people stop talking as if the Fed didn’t want this inflation and is deperate to stop it in its tracks? Nothing can be further from the truth.
Second, the Fed is NOT going to lower interest rates substantially from here. Reason: Growing and substantial international push back against the US and dollar hegemony.
All these debt bloated corporate beasts cannot survive without more debt to buy back shares. Matters not what the price of debt is. They have to do it. As I look at many heavyweight corporate balance sheets, I am amazed at how much debt they have loaded on.
When there time comes, they’ll simply dump the debt in bankruptcy.
We have a very sick economy and sick society. Stop the 1 Trillion+ deficits and we find out real fast how bad things are.
Smart, wise and accurate. Greedy investors will have none of it.
And then stock buybacks will be sold from the treasury account to pay debt at the cost of the share holder.
Unsecured? Covenant lite? Pass. I’ll take Treasuries at 5.5%. Aloha.
Of the two fools, T Mobile paying six percent for a loan to buy its stock. and the buyer getting six percent for a bond rated 2 notches above junk, I would say the latter is the bigger fool.
PS: the debt rating agencies are notoriously debtor friendly, the would be borrower pays them for the rating. As WR points out, SV Bank had great ratings before its collapse into the arms of the Fed.
If debt is rated two notches over junk, in this environment where the S-storm is just beginning, prudence would regard it as already junk. Six percent, or just a bit more than one percent over a GIC is picking up nickels in front of the steam roller, while assuming that it always moves very slowly.
The major reason for BBBYs bankruptcy was stock buybacks of 11.8b since 2004 .
Will BBBY s filing be the first of many due to stock buybacks ?
BBBY failed for operational reasons. If it were merely a problem of too much debt it would have emerged from bankruptcy as a going concern.
Too borrow at these high interest rates suggests they may be optimistic about the economy.
There was a day about 45 years ago when I was sitting on a trading desk and there was a story in the WSJ about IBM borrowing a gazillion dollars by issuing 9% notes. Most of the office made comments about how IBM was run by stupids.
A few years later when rates for the same notes were 18%…….the stupids were laughing and the smarts were paying the rate.
Of course a recession is coming…….maybe…….in 2025 taxes may jump up on the middle class (unless the bankrupt government extends the cuts) and the fiscal stimulus shots will decline, unless they pass another round. So 9 months earlier from November 2024 I suspect things might start to slowly look shaky. That is March, 2024. That’s also about the time Powell will suddenly decide inflation needs to be crushed, being shocked, mind you, that inflation has been allowed to fester in the US.
Cynical is my middle name.
Who knows…..
okay i think you answered my question. If you are a debtor right now you want to double down. Buy the rumor sell the fact i think you guys say. As an investor who would buy unsecured 10&30 year notes? I mean they’re not using the debt for anything productive. They all ready have a ton of debt, and who really thinks T-Moblie lives another 30 years.
Credit spreads are extremely tight. Not a bad time to sell lower quality debt.
The real elephant in the room is all the massive amount of debt that needs to be repriced. The mumbo jumbo from Yellen regarding the Fitch downgrade and outdated metrics is total horse
s..t! You can play with all your metrics all day but the deficit keeps exploding and a bigger downgrade needs to eventually come. Yeh we are the reserve currency and we can print all you want so that the investors get paid back in devalued currency. Also we all know that if the economy hits the skids the deficit will explode. I want a good risk premium above inflation which is over 5% to hold long bonds. Just like the old days!
++
Outside of WolfStreet, I’m amazed at the number of “deflationistas” out there in fintwit. Maybe they are overlooking services? who knows. I sure haven’t “felt” any deflation. Thanks to WolfStreet for the periodic reality checks..
The Freedom Caucus is at it again by pushing for a government shut down unless they get their way. Should they succeed in shutting down the government, even if only for a couple of days, expect another credit down grade along with yields going higher. I don’t exactly how to handicap this, but it will be interesting to watch yields on govies as the week unfolds.
“get their way” = “try to do something about $2 trillion deficits as far as the eye can see,” while the uniparty buys votes.
They are in control of the budget for the Federal government. That is the proper place to reign in spending.
REIN in…
reins are a form of harness
reigns are a form or time of GUV MINT by royalty or similar oligarchy(s)
hard to imagine a society where the vast majority don’t know the difference because they, or WE haven’t any experience with either
but here we are with that ignorance, eh
Anyone who uses ” GUV MINT” is by far the more ignorant.
…easy there, hoss…
may we all find a better day.
If the Republicans get their way, any deficit reduction will be eaten up by more military spending and tax cuts for the rich. It’s a never ending “heads we win tails you lose,” political groundhog day.
If spending was simply reduced to the 2019 baseline, there would be no ongoing annual deficit, spending has increased 40% since 2019, this is the fault of both parties, but anyone trying to rein in the spending deserves our full support, there is no amount of additional tax money that can fix this problem without completely destroying the economy.
It is like those old cartoons, they wind up their punches in big circles with their right, but then suddenly punches you in the face with their left. Surprise! Not really.
Listening to some wisdom from some old school music, TLC.
Don’t go chasin’ waterfalls
Please stick to the rivers and the lakes that you’re used to
I know that you’re gonna have it your way or nothing at all
But I think you’re moving too fast.
Dare I dream 7% 10 year notes? Inconceivable!
I suspect there are two possible outcomes these companies foresee.
Either inflation stays and it is higher for longer as Wolf articulates or alternatively, everything goes to shite and in which case the spreads explode doing the same exact thing even if JPowell & company revert back to their lower for longer
The possibility of soft landing with low rates is a scenario that has not come to play unfortunately.
Given the first two, one might as well raise debt now. If things become bad and you have to raise, your stock might take a further beating.
DM: Furniture companies report record losses as stalling housing market means nobody is buying new sofas
Two luxury U.S. furniture retailers reported drops in their second-quarter sales last week, hinting at a slump in the country’s housing market.
Home sales are down 25% from the same period in 2018 and 2019 and by 32% from 2021. Everyone who reads this site has known this for a long time.
Wall Street and its vast ‘market intelligence’ is mega-slow to catch on and is still acting like all is fine and wonderful in NeverLand even though it isn’t even in the Hamptons!
Sales of new houses keeps rising. It has to. The buyers want to lock in higher rates now, but nobody wants to put their home on the market.
What’s better for the economy: resale home, new sale house?
Always be closing, dauntless builder agents.
Just think what shape America would be in if the trillion (s) of dollars spent on stock buybacks were spent on improving healthcare, repairing the roads, bridges, and electric grid, and bringing the country’s education back to a First World level.
Right? But apparently nobody/entity wants to go down in history for meaningful achievements after so much societal sufferring & strife. Apparently they’d prefer to be remembered for how much they could amass & control because of society’s challenges…hm.
…what was that old bumpersticker? Oh, yeah: ‘…he who dies with the most toys, wins…’ (…still trying to figure out WHAT would be won, but whaddoiknow?).
may we all find a better day.
But without corporate stock buybacks, funded on new debt issuance how are the entitled insiders going to be able to fund their chalets in the hamptons, their mega yachts in Monte Carlo, and corporate jets in manhattan!
Oh, and their fund raisers in Tahiti.
You see it was never about us, and if we question any of it; the response is ‘greed is good’ you commie!
Evidently, this is the way the imf wants it, and with Japan debt at 3x gdp; and still issuing, what the imf wants the imf gets… or is it the bank of international settlements. Sometimes I get so confused.
You are right about the rich. It’s a big club, and we’re not in it.
…always wondered if ol’ George C.’s intent was ‘…club for the big…’…
may we all find a better day.
…on further reflection, mebbe, if written, “…it’s a ‘BIG’ club…”, gives the same result…
may we all find a better day.
Money is not “spent” on share buybacks. None of society’s resources are consumed by the mere transfer of cash from a corporation to a shareholder.
Those are functions of government, not private corporations, and government has decided that social program spending is more important than roads and infrastructure.
T-Mobile cancels $15 autopay discount for all customers using a credit card a month ago because they can’t afford the fees…
Then issues $2b worth of debt at 6% for the purpose of…running their company.
Hmm.
no hmm about it if you know whats happening on the street. Things rapidly slowing down all over and companies even without debt getting worried. Need money to survive if that even works. Mighty (ripoff)Spectrum getting smashed now losing massive customers from Disney cancellation. Who knew? Debt laden companies probably already talking BK strategy at their boardroom meetings. Again buyers of debt will get shafted, for what? another percent of risky return? We have a slow motion train wreck, one box car at a time. Few want to see it. So many overflowing with greed from a superspiked punchbowl that lasted soo long. The music played as Titanic was sinking. Such is denial.
I switched my autopay to a debit card and still get the discount. Much ado about nothing.
Debit card: used to check my credit union’s math at their owned ATM only. Autopay: never ever, especially on a debit card. Cash and rewards credit cards only. At&t keeps trying to funnel me into autopay each month, but they’re just another generic phone network now, unworthy of special consideration. Shame, they were the world’s best not so many years ago. And very profitable.
The Govt and the Private sector are competing for money.
The Govt is pulling money out of the private sector with their massive borrowings. So for those who hold that this is “stimulus” by the govt,, the other side of the coin is that private/publicly held businesses are being hurt by the higher costs of borrowing due to this alleged govt stimulus spending/borrowing game.
All of this is detrimental and can be traced back to fiscal irresponsibility….an irresponsibility that was enabled by fake interest rates courtesy of the Fed.
Now we pay…..because there is always an equal and opposite reaction.
I don’t think you can blame ridiculous federal spending on the Fed at this point. In the past 10 years, sure. But now, Congress is choosing to run trillions of deficits while rates are at 5.5%.
On the flip side, private businesses can get funding, they’re just going to have to offer more than a 1.5% spread.
Most of those spending bills were passed when rates were lower.
All the COVID relief money…..much of which is STILL unspent and went to other things than covid relief.
In the last debt ceiling “debate”, rarely if ever was the cost of servicing the debt mentioned….and with the issue arising again in a few weeks, see if any politician mentions the cost of servicing the debt.
Around 200 billion was stolen. Most has fled the country.
BTW: Revenue Canada just fired over 100 of its employees for collecting fraudulently.
Massive borrowings? Composition fallacy. The bonds just became cash. Too much cash sloshing around creates inflation. Too much debt becomes unaffordable. Screeech.
When Japan intervenes because the yen is weak, they can’t raise domestic rates so they will end up selling treasuries for dollars to buy yen. They have 4% of US debt.
Against that Argentina is openly talking about switching to dollars i.e. the country would formally use dollars and abandon their old inflationary disaster peso. That would be 50 million people in a resource rich country who want dollars and as the dollar strengthens yields would fall. This would btw be the most amazing feat of financial imperialism since the sad end of the British empire.
Anyway my point is that the future direction of treasury yields in the short-term, and by implication borrowing costs for the domestic US economy, seems to me like its unknowable. I think these companies are acting on an asymetric gamble i.e. if borrowing costs go up they go bust, but if they go down great. So they have to err on the side of caution.
I don’t think it can be considered a collective vote that borrowing costs are going to go up.
I agree. Pensions must be funded, at all levels, executives always need to cash out etc….,
Stock buy backs use to be illegal for good reason, after all, this is essentially eating your seed corn to fund golden parachutes for a few.
“This would btw be the most amazing feat of financial imperialism since the sad end of the British empire.”
🤣 Whose “financial imperialism?” China’s? Because the US has nothing to do with it. It’s a presidential opposition candidate in Argentina that is running on a platform that includes switching to the dollar, which Argentine consumers have been hoarding for years anyway because they despise the peso.
It’s just that these “dedollarization” and dollar-collapse folks cannot stomach the idea that a country would be eager to dollarize its economy to get away from the curse of its own currency, the BRICS, or whatever.
There are other countries that have dollarized their economy. And there are countries outside the Eurozone (Africa!) that have euro-ized their economies.
Makes sense, but who is buying all this corporate debt? Like treasuries, T-bills, and other marketable securities, I presume that these corporate bonds can be bought and sold. One big circle jerk that goes on and on and on to ultimately support equities and insolvent pensions…
Did I miss anything? Not that I think her writing was spectacular, but this does come to mind…
“We can ignore reality, but we cannot ignore the consequences of ignoring reality.” – Ann Rand…
“Did I miss anything?”
Yes, everything. Here is who is buying corporate bonds: Retail investors including some people here, bond funds, pension funds (even “insolvent” pension funds have lots of assets and are buying lots of bonds, but they just don’t have enough assets to produce enough income to pay for the future pension benefits that they promised), insurers, cash-rich US companies, foreign investors, etc. Corporate bonds are paying a higher yield than Treasury securities, and so they’re appealing to yield investors that can take some credit risk.
“Corporate bonds are paying a higher yield than Treasury securities, and so they’re appealing to yield investors that can take some credit risk.”
Glad that you mention the risk part! Yes, some shifting away from treasuries, which may drive rates higher for government paper…
Not only are rates not going to decrease for the foreseeable future, liquidity is drying up as the FED’s REPO slush fund is being quickly depleted. The out of control Federal Debt is sucking all the liquidity out of the entire economy. Add to that the fact that many banks are zombie institutions, soon to become insolvent.
“FED’s REPO slush fund”
There is no such thing. Repos (an asset on the Fed’s balance sheet) = $0. Reverse repos (a liability for the Fed) = $1.5 trillion; RRPs are deposits by money market funds at the Fed, instead of at banks, because the Fed pays more interest than the banks, and the banks lost those deposits which is why banks’ “reserves” at the FEd (banks’ deposits at the Fed) are also down by over $1 trillion.
Now money market funds are buying T-bills with the cash on deposit at the Fed, because T-bills pay more than RRPs. RRPs will eventually go to something very low levels.
Here is the nitty-gritty. Please read it carefully so you don’t fall for this “Fed repo slush fund” BS in the future:
https://wolfstreet.com/2023/07/14/the-feds-liabilities-qt-pushed-down-reserves-rrps-by-865-billion-tga-gets-refilled-currency-in-circulation-hits-record/
When the FED creates money without corresponding increases in goods and services, it is a slush fund. It is not BS, it is irresponsible actions of the FED and the Federal government that is causing the coming economic chaos.
OK, someone’s slush fund, Wall Street’s slush fund, it’s out there, I agree. But it’s not the Fed’s slush fund. Maybe I misunderstood what you meant by the “Fed’s repo slush fund.”
Hmm, betting against the yield curve inversion seems like a really stupid move to me. It’s never normalized by the long end going up (which would be bullish for the markets). Let’s see what they think of their purchases by the end of the year once the recession is in full swing.
We are here at day 447 of the Wolfstreet Recession Watch.
It’s a matter of when, not IF. Eventually the cost of capital will squeeze margins to the point where companies will have no choice but to commence significant layoffs. It’s a natural part of the business cycle and we’ve had one of the longest expansions in history.
Your optimism is greatly appreciated, BUT
“Business cycle” — LOL! Can I interest you in a mortgage backed security?
“we’ve had one of the longest expansions in history” — You are taking about the Fed Balance sheet right? LOL!!!
Please, by all means, ALLOW the market to actually price everything, and NOT the Fed! I triple dog dare you! How is the USG going to actually roll debt over and issue new debt with the ten year bond at 20%?
“one of the longest expansions in history” depends on whether or not the COVIDcession counts as a real recession, no? If the clock restarted there, we could have a ways to go
And it usually takes 12-18 months for markets to react to the interest rate hikes at the Federal Reserve. Maybe you should have started the watch a lot later?
I didn’t start it. That was when posters started predicting a recession was under way. Mostly ones who read Zerohedge, I believe.
Markets can react immediately or even in anticipation of rate hikes, as we have seen. But getting that market reaction to impact inflation can take about 12-18 months, it is said.
Waiting for Godot?
It is interesting that Hotel stocks are at All Time Highs. So are home builders.
Yet.
Airline Stocks are at Covid lows. They recovered from covid lows and now have dropped and gave up all the gains. I guess their labor costs are hurting profits while labor costs do not hurt hotels that much. Pilots wage increases are probably equals 20x the increase in the wage increase for maids.
Banking stocks are in real bad shape too but Walmart and Costco are at ATHs.
Crazy economy.
The real issue is that there are too many money managers out there, whether private or professional, who “rotate” into other sectors when they sell one type. They don’t want to hold treasuries, because they feel they need to “beat” that.
At some point, the wheels come off. I just don’t know when.
I saw a JP Morgan exec on Bloomberg today. At the end of last year 2022, he was calling for a recession in the fall of 2023. When the banking crisis happened, he was sure there would be a recession this summer.
Oh well. He said low unemployment, wage increases, and surprising earnings growth surprised them.
He is now calling for a recession at the end of the year. Well….that is just a few months away and it sure does not feel like one is about to start.
Oh….he also said the 10 year Treasury is a screaming buy.
After his failed recession calls, maybe it is wise to fade his screaming buy call.
Funny, Dimon just said yesterday that he would not be a 10Y UST buyer with yields at 4.2% and yields could go all the way to 5.5%.
NVMark – That is too funny.
This is from yesterday. He expects a FED rate cut and thus by the 10 year.
Bob Michele, CIO and global head of fixed income and commodities at JPMorgan Asset Management, says the Federal Reserve is signaling that it is willing to “make the economy a casualty” by prioritizing inflation-over-growth. Michele explains why he still expects a Fed rate cut by the end of the year on “Bloomberg Surveillance.” (Source: Bloomberg)
Investing has been nonlinear for a long time. Impulse functions, echo oscillations , and log feints. Why play? Statistics?
Why bet on what others are going to do with your capital? Use your own capital with people you trust and ideas in your community. Start a small business.
Oh yeah. You will get screwed with regulations and laws and zoning and licensing and taxes.
Sucks to be non-crony-corporatize.
Remember that Congress passed a 1% tax on stock buy-backs, so if T-mobile is using that debt to buy back stock, they’re really paying more than 6%. I’m not sure on the math, I don’t think you can just add 1% to 6% to get 7%, but it is going to cost them more vs. using cash on hand to do buy-backs.
The buyback tax is a one-time tax. So just a theoretical example: if T-Mobile buys back $10 billion in stock, it pays a one-time tax of $100 million. If it borrows $10 billion for 30 years at 6% to fund the $10 billion in buybacks, it’s paying $600 million a year in interest for 30 years.
Obviously, it is also using its cash flow to buy back shares. So it’s a mix.
When I spoke of “sick economy”, all the wireless carriers are a perfect example. Same with internet suppliers. All of these should be combined into one large national utility or several regional utilities and run/overseen like a utility. Costs would drop in half. It is utterly stupid at this point in the life of these services that we continue to support 3 or 4 different suppliers when the product/service is a utility.
But of course, look at all the duplicate jobs that would be eliminated.
There is no efficiency/productivity in America today.
Can you elaborate how cost would drop in half?
Wireless carriers compete. They put up cell towers to improve service against their competitors. You can switch to a service that better suits you and your area.
Internet can be supplied via cable, fiber-optic or satellite. People often have choices (although I’ll admit often they are locked into one). Which option do you think the government should choose? How will they make that choice?
Mike R. – don’t necessarily disagree with you, but think you might benefit from learning the history of AT&T, the reasons for it’s breakup, and the bloody battles conducted by internet providers in Congress to avoid being classified as communication utilities…best.
may we all find a better day.
Fifty years ago the post office did the telephone service in Germany. I have handwritten operator international call booking receipts from them. Starnberg in Bavaria to Glasgow, six minutes DM 10,80($3.37us: to Santa Clara CA, 18minutes, $41.06us, to Mexico City, two minutes, sixteen 1973 dollars. Sixteen bucks was palpable wealth in an American store in those days. For business we used Telex/TWX over phone lines. There’s a lot of different phone service providers now, sure, but it’s much cheaper to talk to people in other places now.
rick m – a good reminder of the days (not THAT long ago, my rural NorCal area was on party lines until the late (19)70’s) of non-digital/non-fiber optic/bandwidth and switching limited by hardwire cable and available microwave/satellite transmission/relay resources…
may we all find a better day.
MW: Bank-trade groups blast proposed U.S. bank capital requirements as illegal
Yes, why would that surprise anyone? Banks HATE capital requirements. They’d much rather collapse and get bailed out.
You should start a website of your own with all these headlines you’re posting. You could call it The Daily Mail
cheat sheet of corporate bond credit ratings, needs its hyperlink
Thanks, done.
Large corporations are not owned, they are controlled. Managements incentives are to plunder the company. An owner wants to build. Those who control an entity they do not own want to extract.
This is todays Capitalism where the word simply becomes a synonym for Corporatism
Wolf – the link to your corp bond cheat sheet seems to be missing.
Ooops. Sorry. Fixed.