Blue-chip companies that need to borrow in the US now are increasingly relying on commercial paper to avoid locking in longer-term borrowing costs in a market beset by turbulence.
With the Federal Reserve poised for a fresh hike Wednesday, the days when blue-chip firms borrow super cheaply for decades are gone, at least for now. Corporate treasurers have instead been turning more to commercial paper, a type of unsecured debt that typically lasts 270 days or less.
The total amount of these IOUs outstanding has mushroomed to nearly $1.2 trillion this year, up more than 20% from its lows in 2020, with computing giant Apple Inc. and pipeline-owner Kinder Morgan Inc. among those that have been dipping more into the market this year. At the same time, investment-grade companies are relying less on longer-term debt markets, with sales of high-grade corporate bonds dropping about 7% in 2022, according to data compiled by Bloomberg.
If you strip out banks and other financial companies, sales of this kind of debt in the first half of this year were the lowest since at least 2016, according to BMO Capital Markets. Companies are essentially betting that the Fed will get inflation under control, and that longer-term rates will stabilize after rising for much of the year.
“All this volatility has corporations just trying to ride this out with commercial paper issuance as more of a placeholder for them until things start to calm down,” said Peter Yi, director of short-duration fixed income and head of credit research at Northern Trust Asset Management, which oversees around $1.2 trillion.
In re-embracing commercial paper, companies are returning to a market that has a history of seizing up during systemic crises. But lately borrowing in longer-term markets has grown trickier than it usually is.
Widening Gap | Commercial paper is cheap for companies relative to short-term bonds
There have been about 49 days in 2022 where not a single company sold corporate bonds, which can imply that the market was essentially closed, compared with 12 days in the same period last year, according to data compiled by Bloomberg News. An index of bond market volatility, the ICE BofA MOVE Index, had climbed to 128.27 as of Monday, from 77.1 at the end of last year.
The Fed is in tightening mode -- officials are widely expected to lift the central bank’s benchmark by 0.75 percentage point at its next decision Wednesday so rates at the very shortest parts of the lending curve aren’t likely to retreat much any time soon. The longer-term outlook is harder to forecast, especially if rate hikes end up pushing the economy into a slump.
There are already early signs of potential recession, including an inversion of key segments of the Treasury yield curve and news this week from big-box retailer Walmart Inc. that shoppers are cutting back. That kind of macroeconomic uncertainty has made many investors reluctant to buy longer-term corporate bonds from those companies that have been willing to venture into the market.
Meanwhile, heightened investor demand for commercial paper has made it relatively cheap for companies to fund in that market. For example, borrowing for 30 days in the commercial paper market can cost about 2.25% as of Monday, while yields on high-grade bonds maturing in one to three years were averaging about 3.95%. The gap between those two rates -- a measure of the savings from borrowing in the CP market -- is wide compared with the averages for the last five years.