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Corporate Bonds at Record Levels

Posted by Steve Markowitz on August 28, 2014

The Wall Street Journal reported that corporations are issuing US bonds, i.e. taking on debt, at record levels.  This is the third consecutive year for a record.  So far for 2014 the issued bonds are just shy of $1 trillion.

When corporations sell bonds, typically this is done to raise funds to be used for future expansion.  Such expenditures are usually productive and can be beneficial to the economy as a whole.  However, these are not normal economic times.

With interest rates remaining at record lows for years, companies are taking advantage of this abnormality, issuing debt to refinance previous loans, or merely holding cash with the belief that interest rates will rise in the future.  This hoarding of cheap cash creates economic imbalances with consequences to play out in the future.

The Fed’s low interest rate policies have not created an environment for a sustained economic recovery.  It can be argued that these policies have in fact delayed the recovery by not allowing supply and demand to meet their natural levels.  In addition, many who rely on fixed incomes, such as the elderly, are being hurt as their incomes decrease.  Finally, the artificially low interest rates have led to equity valuations that are now in bubble territory.  The world got a taste of the downside of bubbles in 2008.

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