Question

Based on your current assessment of current international relations in the context of bond yields, where do you think yields may go? How would that impact corporations in the US? What about companies that borrow money abroad (in the bond market)?

Answer 1

After sub-prime crisis, using quantitative easily, liquidity was introduced in the market and FED maintained near zero interest rate since then. However, with the economy picking up in US, the FED has been raising interest rates for last couple of years. As a result of this phenomenon, the expected rate of return by the investors has gone up. And the debt securities currently outstanding in the market are trading at discount since such securities are yielding lower returns than the prevailing rates in market. Hence the yield on outstanding debt securities is going up for new investors with the rising interest rates and will continue till any adverse macro economic event occurs.
This is going to have significant impact for US corporations from following perspective:

1) With the near zero interest rates as a aftermath of sub prime crisis, the corporations in US have been investing heavily offshore to gain better returns. Hence this led to significant capital flight to emerging economies. Now, since the interest rates direction has reversed, this might see the reversal in capital into US economy

2) US corps holding outstanding debt securities facing interest rate risk with rising interest rate risk. Because such corps are earning lesser rate of returns than the prevailing rates in economy

3) US Corps mulling to raise new debt from the market are required now to give higher rate of return since with the incresing yield in economy has resulted increase in expected rate of return. With the expensive debt issue, this will directly impact the profitability of companies