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The Loan Ranger

Investors sell corporate bonds

Image source: pathdoc -Shutterstock

What's going on?

Investors are bailing out of companies’ bonds – to the tune of $5.7 billion in the past week – and are pouring their cash into government debt instead, according to the Financial Times.

What does this mean?

Investors judge how risky bonds are by looking at their “yield” – the annual return they offer – relative to other investments. While a higher yield means more profit, it also means there’s more risk that the borrower can’t pay its debts. Companies’ bonds are usually seen as a safer investment than their stocks (bondholders get paid back first in the event of disaster), but an increase in yields suggests some investors may believe things are getting riskier – giving other investors the jitters.

Why should I care?

For markets: Chickens coming home to roost.


Investors may be worried about how much debt companies have as the US increases interest rates and some signs point to a global economic slowdown. For years, companies have taken advantage of record-low interest rates to borrow money for acquisitions or expansion plans – but as rates increase, it makes that debt more expensive to pay off. If consumers also happen to be spending less, then that’s not a good combination. Take Uber, for example. The ride hailer sold around $2 billion of bonds last month, but later revealed its revenue growth was slowing, which makes it harder to reduce its losses and pay back bondholders.



The bigger picture: Gimme shelter.


Bond investors are seeking safer havens and sheltering under government debt. While it’s uncommon for big companies to go bust and default on their debts, governments almost never go bankrupt. Even countries in perilous financial situations can usually turn to their central banks and print new money to pay bondholders (unless they’re, say, Italy). But this is a risky strategy too: it can increase inflation, making things more expensive for businesses and consumers and potentially sparking a recession (like in Venezuela).

Originally posted as part of the Finimize daily email.

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