The U.S. corporate bond market has been on fire this year. Major companies have been keen to lock in low interest rates, while narrowing spreads on corporate debt have promised better returns for yield-starved fixed-income buyers. But the latest bond issue, a $5-billion (U.S.) refinancing by General Electric Co., should concern market watchers deeply – not because of the quality of the credit, but the reasons behind the industrial giant's move. (Full disclosure: I own GE shares.)
GE's move isn't just about taking advantage of good rates, but battening down the hatches if a fiscal tornado touches down as feared in the new year. Speaking to the Financial Times, Keith Sherin, chief financial officer of GE, said the company was girding its balance sheet to prepare if the U.S. goes over the dreaded fiscal cliff in early 2013. "We issued it in October so we don't have to worry about what happens if the fiscal cliff is not resolved," Mr. Sherin told the paper. "If it's choppy, we're prepared."
Other corporate issuers are also watching the skies and worrying: Last week, corporations sold $26-billion in investment grade bonds in the U.S., setting a torrid pace, the FT reported.
The concern, of course, is that the U.S. Congress will fail to reach a budget deal in the weeks following U.S. elections next month, which would trigger tax increases and spending cuts at the same time, causing a recession. With major global bellwethers reporting disappointing earnings and warning of revenue pullbacks across the board this month, stock markets are beginning to tremble; the global economy can hardly afford the added impact of a political gamesmanship gone bad in Washington over the budget, which would be disastrous. The rush to refinance long-term debt is more than just prudent risk management; it's an indication corporate America is a few steps ahead of equity markets in adopting a more bearish view on the economy.
Sean Silcoff