Any retelling of the post-pandemic macro narrative has to include a nod to the fact that rate hikes in the US had unintended consequences, and I don’t mean in the traditional sense that Fed hikes always “break something.”

“This time” really was “different” in several respects, not least of which is that the great transfer of leverage from the private to public sector following the financial crisis meant that corporate and household balance sheets were already in much better shape than the government’s by the time the pandemic hit.

Then, the Fed afforded corporates and households a once-in-a-lifetime opportunity to refi and term-out fixed in 2020 and 2021. As a result, subsequent rate hikes actually accrued as a windfall both to household and corporate “haves,” albeit not so much for the “have-nots.”

If you were a “have,” your liabilities were long-tenor and fixed-rate, while one of your key assets — money market funds and corporate cash — was overnight and floating. Your debt was locked in for the long-term at some of the lowest rates in history and the rate on your liquid savings was about to go from 0% to 5% in the short space of two years. Yahtzee!

Corporates (and every well-to-do homeowner in America) have done very well on what was effectively history’s simplest-to-execute rates arb. Have a look at the figures below from SocGen.

On the left is an estimate of the cumulative change in net interest income since end-2021, which is to say since just before the Fed started hiking rates. The figure on the right’s even starker: Never before have corporates experienced a positive net interest income change during a Fed hiking cycle, let alone one worth 50bps of GDP.

“One may argue that the combination of tight monetary and loose fiscal policy at a time of low private sector leverage has had the opposite effect to what was intended,” SocGen’s derivatives strategists remarked, in an outlook piece published this month. “The sections of the economy (households and corporations) with savings get rewarded with high rates of interest, while government finances worsen mechanically — further reducing the attractiveness of sovereign debt.”

That latter bit nods to the self-fulfilling prophecy that’s bedeviled DM government bonds: As you raise rates, the government’s interest burden increases, fanning fiscal concerns to the further detriment of the bonds, and around we go as higher yields make it more expensive to issue, pushing the interest burden even higher in a deleterious spiral.

By contrast, SocGen went on, corporations “are currently paying significantly less net interest than they were at the end of 2021.” If you’re wondering how important that is for corporate bottom lines, the answer’s “very” and the read-across for risk premia admits of a similarly self-fulfilling dynamic, only in a virtuous loop. As SocGen put it in the same note, by helping to keep profit margins at or near record highs, “a lack of interest cost pressure has in turn helped keep corporate credit spreads near all-time lows.”