Rising rates have been a boon to some US corporates, and I don’t just mean banks.

Over the last two or three months, it dawned on market participants that companies which borrowed at rock-bottom rates and stockpiled cash have been able to i) avoid increasing their cost of debt because they can fund current expenditures with cash, and ii) enjoy an extra income stream on any cash they don’t spend given the run-up in cash yields.

SocGen’s Albert Edwards made a big deal of this last month. “Companies have effectively played the yield curve in reverse and become net beneficiaries of higher rates, adding 5% to profits over the last year instead of deducting 10%+ as usual,” he exclaimed.

If you’re wondering when this dynamic will change, the answer is “It depends.” In the linked article, I noted that corporates binge-borrowed in 2020 and 2021, filling their coffers “just in case the plague didn’t abate.”

High grade issuance over those two years (2020 and 2021) was a combined $3.2 trillion. That reinforced a trend that was already in place.

“The duration of corporate debt has roughly doubled over the last thirty years, slowing the pass-through from funds rate hikes to interest rates paid by firms and to investment spending, and therefore reducing the economy’s near-term sensitivity to the funds rate,” Goldman’s Ronnie Walker and Sienna Mori wrote, in a new note, adding that “this shift towards longer maturities accelerated during the pandemic, with firms refinancing en masse in 2020 and 2021 to take advantage of lower rates.”

The figure on the left, below, gives you a sense of things. If I were Goldman, I’d have pinched the y-axis to make it clear that the notional share of IG and junk bonds maturing within two years was the lowest since at least 2007 headed into the Fed’s hiking cycle.

The figure on the right, above, shows that although refinancing needs will stay historically low in the near-term, they pick up after that.

“Current market rates are roughly 1.5pp above the average rate that companies are paying on existing investment grade bonds and 2pp above the average rate on high yield bonds,” Walker and Mori went on to say.

Of course, not all of that difference would go straight to the bottom line. Some of it would be hedged away, but Goldman gently noted that “firms rarely hedge the entirety of their rate exposure, and in many cases, they hedge none of it.”

So, what’s the takeaway? Well, Walker and Mori said that interest expense will probably increase “only modestly in 2024,” but it’ll jump more quickly after that. They looked at firm-level data going back more than half a century and determined that every additional dollar of interest expense translates to 10 cents less in capex and 20 cents less in labor costs, “about half of which comes from reduced employment and half of which comes through lower wages.”