The first week of September saw the biggest weekly increase in US corporate debt in roughly 47 years.
On Monday, Stockhouse explained the recent stretch of bond yields and how it relates to the average investor, but also what it means for mega corporations.
This clouded bond market state has led to a boom in debt refinancing and corporations such as The Disney Co. (NYSE: DIS) and Apple Inc. (NYSE: AAPL) (as well as other FAANG stocks) have been quick to cash-in. A connection is emerging between these juggernauts and the tens of millions of American homeowners who have either refinanced their home, or have opportunity in the mortgage market.
Low rates + potential of lower rates = time to borrow
Since the beginning of the summer of 2019, mortgage refinancing applications have surged, with their volume rocketing up 152% in this most recent weekly period, and tripled in August.
When CNBC covered this rise, it noted that Apple and Disney were joined by blue-chip corporations Deere (NYSE: DE) , Caterpillar (NYSE: CAT) and Coca-Cola (NYSE: KO) to rush back into the debt market with near $75 billion in issuance of US investment grade corporate bonds by the first week after summer’s end. This is the biggest weekly increase since 1972.
US investment grade yields have also declined over the course of this year. Apple, Disney and Deere all issued 30-year bonds at yields below 3%, a first for the corporate bond market.
As CNBC reporter Eric Rosenbaum noted: “It’s a type of financial thinking from the C-suite that occurred after a massive August decline in yields, which resulted in extremely low borrowing costs.”
The strategy that these corporations are executing is tobe opportunistic and take control where they can. Homeowners are advised to follow a similar method.
Mortgage rates follow the 10-year Treasury, which fell roughly 50 basis points in August. Those yields haven’t fallen this much since the last financial crisis.
Since borrowing rates are so low, now is a good time to issue debt. Low rates combined with the anticipation that rates could fall even lower are enticing more people to look into borrowing, since they can borrow and refinance without the usual concerns of cash flow or liquidity.
However, some experts warn that when rates get so low or even in a negative territory could encourage excessive borrowing. This could be bad for the economy, though there are ways to stabilize your portfolio in advance.
A race for scale
More money in the vault means more opportunity to grow. Also of interest to the investing community at large is how this could change the landscape of corporations from a merger and acquisition perspective.
Led by Disney swallowing media companies up like a great whale, consolidations and mega deals are rampant. It has proven successful for near-term profits and experts forecast the trend to continue among other sectors. This requires more capital to grow, it also requires greater global distribution, which means more consolidation.
An industry behemoth like Disney or Apple can deploy this strategy, but not everyone can copy their playbook, so it remains to be seen how this will shake out among second-tier and lower companies. Lions Gate Entertainment Corp. (NYSE: LGF) has been trying a similar move to expand its streaming service Starzplay, which hasn’t resonated so well with its share price. Investors will have to remember the old adage that not all mergers are created equal and just because a deal generates buzz doesn’t mean every similar deal will lead to equal potential.