NEW YORK — The recent decline in bank-to-bank lending rates is having no effect on corporate bonds, which continue to plunge in value — a sign that the market believes more loan defaults and a wave of bankruptcies are ahead for U.S. companies.
There were some positive signals from the markets Tuesday — the Federal Reserve reported that issuance of the short-term corporate debt known as commercial paper spiked Monday, a turnaround from a prolonged slump.
Still, market rates on corporate bonds have continued to rise compared with Treasury yields for nine straight days, said John Atkins, a fixed-income analyst at IDEAGlobal .
This trend is hitting non-investment-grade bonds, or junk bonds, the hardest but is occurring in investment-grade bonds as well.
About half of rated U.S. companies are non-investment- grade, according to Standard & Poor’s.
Junk bonds simply aren’t being issued right now, but their rates in the market for existing bonds determine how much companies would have to pay if they needed to issue them to raise cash.
If these rates keep rising, the cost of financing through the corporate bond market will become cost-prohibitive for many companies — compounding the problems that the economy is dealing them.
The bond default rate for junk bonds rose to 2.86 percent by the end of September from 0.97 percent at the end of 2007, S&P said.
Many analysts predict that percentage rate will reach double digits next year.
“Defaults will start stacking up quickly — names you know, things you drive by on the way to work,” Atkins said.
When companies default on their loans, they often have to file for bankruptcy.
The U.S. government, like other governments, has been pumping money into banks to keep them afloat and available to make loans.
But that protection “doesn’t extend out to the entire universe of nonfinancial corporates,” said Michael Feroli, a JPMorgan Chase economist. “It’s hard to argue that certain manufacturers are systemically important.”
Although the world’s banks are more flush with cash than they were a few weeks ago, participants in the credit markets are now wondering how that capital is going to be used.
Companies that are in decent shape are hunkering down, trimming their payrolls and putting off growth plans so they won’t have to borrow money.
With some companies loath to borrow to expand their business, and other companies struggling to stay afloat in a climate where banks want to lend to only the most creditworthy borrowers, the length and depth of the economic downturn — and how many more job cuts lie ahead — remains uncertain.
“We’re just going into the worst part of this,” Feroli said.
Meanwhile, it appears the Fed’s program to buy three- month commercial paper is helping to boost that market.
Commercial paper is the short-term debt that companies sell to finance their day- to-day operations, such as maintaining inventories and payrolls.
The Fed reported Tuesday a spike in total volumes for commercial paper with maturities over 81 days to $67.1 billion Monday.
That’s up from daily volumes last week ranging from $3.6 billion and $7.8 billion. Monday’s jump in issuance occurred in the commercial paper sold by financial companies, and the commercial paper backed by assets such as mortgages and credit-card debt.
