Corporate bond sales this month will be the worst since 1999. According to Bloomberg, they will only hit $47 billion, down from $183 billion in April. The borrowing machine that has allowed US corporations to lower the cost of the debt on their balance sheets, raise dividends, continue share buybacks, and expand their operations has come to an end. If the trouble in Europe continues, access to capital among blue chip companies could remain difficult. The situation with junk bonds, a critical financing tool for many US companies, is even worse.The trend is caused by a “flight to safety” among fixed income investors. This means Treasuries. The trend may lower America’s ability to finance its growing deficit and may even trickle down to related interest rates like mortgages, which are running well below 5% for 30-year fixed. But the lack of capital for corporations could be a major cause of slowing of the domestic economy. And it could make equities less attractive.
American businesses have been reluctant to hire which has kept total unemployment and under-employment over 17%. That has been, and will continue to be, a drag on GDP improvement and consumer spending. Congress continues to extend unemployment benefits, at the cost of tens of billions of dollars to taxpayers.
In the meantime, there is no way to offset the higher borrowing costs for US companies. There is also no way to offset the effects of the scarcity of capital.
Geithner, Summers, and other Administration officials have argued that the crisis in Europe is not likely to damage the US economy. That is not true. The effects have begun already and could be long and profound.
Douglas A. McIntyre