U.S. companies issue more fixed rate debt as yields rise

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(Reuters) – U.S. companies are choosing to issue fixed-coupon bonds over floating-rate bonds because the specter of rapidly rising yields prompts them to lock in their borrowing costs.

FILE PHOTO: American flags fly in front of the New York Stock Exchange (NYSE) in New York, United States, February 16, 2021. REUTERS / Brendan McDermid

Refinitiv data showed that U.S. companies issued $ 456 billion in fixed coupon bonds through March 15, an increase of 12% from the same period last year.

At the same time, they only borrowed $ 77 billion through floating rate bonds during that period, down 33%.

Chart: US fixed vs floating bond issue –

In particular, the issuance of junk fixed-rate bonds, issued by lower-rated companies, nearly doubled this year to $ 108.8 billion, according to the data.

Graphic: More

American Airlines Group, Carnival Corp and T-Mobile have been the major issuers of high yield bonds this year.

Graph: Comparison of emissions –

“We hear that corporate issuers are stepping up issuance because of fear that interest rates will go up,” said Jake Remley, portfolio manager at Income Research + Management in Boston.

“For high yield issuers, foreclosure of attractive fixed coupons is particularly important given that they have lower debt coverage ratios,” he said, referring to the possible risks if these firms were to issue bonds. bonds at variable rates that eventually went up.

U.S. companies hardest hit during the pandemic have aggressively raised funds over the past year by issuing bonds to meet their working capital needs and paying off existing debt. Analysts expect such borrowing to continue this year, until economies recover significantly.

Meanwhile, yields on U.S. Treasury debt hit their highest levels in more than a year amid continued economic optimism and expectations of increased debt supply following approval of a 1.9 trillion dollar stimulus package against coronaviruses and rising inflation.

Soaring Treasury yields are likely to increase borrowing costs for issuers paying variable rates, as their interest payments move in line with benchmark yields.

“If inflation really spikes, the Fed may be forced to raise its short-term interest rate by 0%, which would be a concern for those issuing floating rate debt,” Remley said.

Reporting by Patturaja Murugaboopathy; Editing by Vidya Ranganathan and Chris Reese


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