The frothiest corner of the fixed-income markets seems to have missed the memo that the Federal Reserve is lifting its foot off the gas. Despite concerns last summer that a reduction in bond-buying might wound the global economy by making it harder to borrow, Bloomberg News reports that U.S. companies owned by private-equity firms are borrowing more money than at any point since the go-go years. The New York Times reports today that the French company Numericable Group SA is poised to sell the most junk bonds ever, breaking the record set by Sprint Corp. in September. And lenders are barely getting any compensation for the risks they're taking.
You might think that all this corporate borrowing is exactly what rich countries need to finish recovering from the great recession. (Today's new home sales are a sobering reminder of how weak the U.S. economy remains.) Unfortunately, most of the new debt isn't being used to finance productive investment or hire additional workers. Corporate spending's contribution to U.S. economic growth shrank considerably from 2012 to 2013.
Instead, the debt is being used for acquisitions, as in the case of Numericable, or to pay shareholders dividends and to buy back shares. (Here's an interesting article on the origins of this latter phenomenon.)
The ease with which private-equity firms can borrow from banks and investors to pay themselves and their limited partners helps explains why they are now spending more for companies than they were even before the crisis. Lenders are so desperate to earn a decent rate of return that they are even willing to accept payment-in-kind notes, which pay interest with additional IOUs in lieu of cash.
This is what we get when policymakers push people to borrow at the same time there is nothing worth investing in -- the same problem we had 10 years ago. Businesses might be more willing to expand and hire if more customers were eager and able to buy their products. Right now that seems like a far-off prospect, but if central banks were able to boost worker incomes as easily as they can lower junk-bond yields, maybe rich countries wouldn't still have such weak economies.
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Matthew C Klein