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The phrase “investment-grade maturity wall” might sound odd to people who have been in (or around) markets for the past decade.
Normally, investors get warnings about so-called maturity walls for junk-rated bonds. Companies with lower credit ratings tend to have more trouble paying down or refinancing debt when rates rise, so when a whole lot of risky bonds come due, that could mean a whole lot of defaults.
For investment-grade companies, the main risk is that companies will have less cash on hand to do other things, like buy back shares or acquire/invest in other companies. What’s more, companies did an absolute ton of long-term borrowing when rates were close to zero approximately two years ago.
So it’s hard to get too worked up about the recent increase in the share of short-term bonds in the investment-grade bond index, which Bank of America highlighted in a note Wednesday. See the chart below, which excludes banks and other financial companies:
Presumably, before any of these bonds defaulted, they would be downgraded to junk. (One would hope.)
Still, there are signs of rising financial pressure even in investment-grade markets.
Companies’ overall levels of short-term borrowing jumped above the long-term median in the second quarter, for example. This is odd, because companies should absolutely be selling longer-dated bonds right now; it’s one of the rare times that it’s cheaper to borrow for longer periods, with the yield curve inverted.
So it may not be a great sign that companies’ aggregate share of short-term debt jumped by a full percentage point in the second quarter, via BofA:
The historical data in the chart above reinforces the idea that companies shouldn’t (and mostly don’t) want to rely too much on short-term debt. The share of short-term borrowing rose ahead of the 2013 oil collapse and ensuing mini-meltdown, the Fed’s tightening cycle in 2017 and 2018, and of course the Covid-19 mess.
Bank of America doesn’t provide an explanation for the most recent rise (nothing to see here folks!) but it seems reasonable to think that inflation could finally be nibbling at companies’ cash hoards. Perhaps they think that rates are not going to stay high so they don’t want to lock in expensive debt. And it’s very possible that tightening credit conditions have started affecting buyers’ habits, whether those buyers are individuals or businesses.
Regardless, it does seem like shareholders will be facing some competition for extra corporate cash as companies refinance at higher rates.
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