Corporate America Rushes to Borrow Low-Interest Money

Investors may ultimately pay the price for corporate America’s recent rush to borrow low-interest money in the credit markets.

Companies sold an enormous amount of new long-term securities this past week.

At least $11.38 billion in new corporate bonds were offered, easily beating the previous single-week record of $7.75 billion set in April, 1986.

Analysts expect company treasurers to use most of the proceeds to pay off existing bonds that have higher yields than the new issues.

Much the same way homeowners have been taking advantage of lower mortgage rates to lower their monthly payments, companies hope to save millions by refinancing bond debt.

For the companies, they get to save some money by calling their bonds in for redemption. But investors will get their money back sooner than expected and will have to reinvest it at lower interest rates.

Nervous investors have begun to take defensive actions against anticipated calls. Kemper Securities Group, for example, has been encouraging people to sell their callable bonds before the inevitable occurs.

“It’s the biggest race in the world right now,” said Richard Morton, manager of taxable fixed-income securities for Kemper Securities Group in Chicago. “People are stretching for yield.”

Yields on government and corporate bonds have tumbled since the Federal Reserve on Dec. 20 slashed its key discount rate by a full percentage point to 3.5%.

As low as yields are, however, investors are still attracted to corporate bonds because of even lower interest rates elsewhere.