When it comes to explaining the conspicuous absence of “the most well-telegraphed recession in US history” (as some observers describe the downturn that still hasn’t occurred), the juxtaposition between very low debt servicing costs and very high rates on interest-bearing cash is among the most-commonly cited factors.
This is one (but not the only) way in which higher rates are arguably contributing to inflation, or at least serving as an impediment to the Fed’s efforts to run the proverbial “last mile.”
Households with very large money market fund balances are enjoying a monthly income stream that may well be supporting consumption. And corporates which termed-out their debt profiles in 2020 and 2021 when issuance boomed are able to generate a hefty return on whatever portion of their cheap borrowed money is parked in cash. To the extent that money’s being used to fund operations, that too is helpful as it delays the need to recognize a higher cost of capital through new borrowing at higher rates.
In both cases (i.e., for well-off households and high quality corporates), higher rates are effectively a boon to the economy. With that in mind, SocGen’s Jitesh Kumar and Vincent Cassot noted that this is the first time in modern history that the interest rate earned by companies on their cash is higher than the rate they’re paying to service their debt.
“This implies that the traditional transmission mechanism via the inverted yield curve is less effective during this monetary policy cycle,” the bank wrote, adding that until that debt’s rolled/refinanced, corporates will likely “remain in a relatively healthy situation” given that policy is in fact “not very tight for them.”
This is well-worn territory, but just in case: The maturity wall for large US corporations isn’t especially steep, which means it’ll be a while before higher rates bite, and that’s assuming they bite at all. If rates are lower by the time the debt matures, some companies may not ever feel the impact of rate hikes, or at least not on a portion of their debt load.
If you’re wondering just how dramatic this dynamic really is, Kumar and Cassot estimated that “the interest being earned by S&P 500 companies on the cash held on their balance sheets has risen five times as fast as the cost of debt for US companies.” (My italics)
The inescapable conclusion, again from SocGen: “Counterintuitively, the fast hiking cycle has arguably helped the corporate sector.”
This happy circumstance is largely limited to large and public companies with access to fixed income markets. Smaller and private companies – from small biz up to $1BN revenue – are more dependent on bank lending and have been squeezed between costs, consumers, and large companies. I saw a study indicating the “middle market” has seen EBITDA and EBITDA margins contract by 25% since 2019.