Corporate Bond-Borrowing Spree Begins 2024 with a Bang


A Different January

Improved Returns

Money-Market Funds Benefit from Bank Deposit Outflows

Money-market funds experienced significant growth in 2023 due to the outflows from bank deposits following a banking crisis in March. As a result, the sector ended the year with nearly-record levels of assets, reaching $5.9 trillion, according to the Investment Company Institute.

Federal Reserve Signals Potential Rate Cuts

In a surprise move in December, Federal Reserve Chairman Jerome Powell indicated that the central bank aims to avoid keeping rates high for an extended period. Additionally, three rate cuts are expected in 2024. Such a shift could cause the returns on Treasury bills and other similar investments to decrease, potentially impacting investors who may have been used to 5% returns.

Hopes for a Soft Landing and Fed Pivot

The hope for a soft landing in the economy, coupled with expectations for a Federal Reserve pivot, has contributed to a considerable decline in the benchmark 10-year Treasury yield. This decline helps lower borrowing costs and boosts bond returns.

The Impact on Corporate Earnings

Although companies have yet to fully experience the lag effects of the Fed’s policy rate sitting between 5.25% and 5.5%, it may still have an impact on corporate earnings. However, Adam Turnquist, chief technical strategist at LPL Financial, suggests that a 10-year Treasury yield below 4% would be favorable. Nevertheless, he acknowledges that interest rates are unlikely to enter an ultralow era.

Weaker Dollar Offsets Higher Interest Rates

In recent months, the weaker U.S. dollar has acted as a counterbalance to higher interest rates. This trend is particularly beneficial for U.S. companies as a significant portion of their earnings are generated abroad. Thus, a weaker dollar ultimately improves their bottom line.

As of Tuesday, the 10-year rate stood at approximately 3.95%, which is in line with its starting point in 2023. In October, it briefly surged to 5%. Meanwhile, the yield on the ICE BofA US Corporate Index, after reaching 6.3% in October, currently sits at 5.14%, having stayed below 4% for the majority of the past decade according to data from the Federal Reserve.

Mixed Stock Market Performance

On Tuesday, stocks closed with mixed results. While the Dow Jones Industrial Average achieved another record close, the S&P 500 index and Nasdaq Composite Index ended lower, marking the start of January.

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