Finance Teams Prepare for Higher Rates

Companies issue bonds now, locking in lower interest rates, as Fed embarks on tapering.

The Federal Reserve’s December announcement that it will begin decreasing the amount of securities it buys in its quantitative easing program this year points to a continued increase in long-term interest rates. But with economists expecting economic growth to be as good as last year’s or better, the higher rates aren’t expected to discourage companies from issuing debt.

At the end of 2013, the 10-year Treasury bond rate stood at 3.04 percent, up from 1.78 percent at the end of 2012. Milton Ezrati, senior economist and market strategist at Lord Abbett, an asset management company in Jersey City, N.J., expects long-term Treasuries to rise another 100 basis points this year.

The talk of debt issuance comes on the heels of two years in which corporates increased their issuance of bonds. Last year, U.S. companies issued $1.07 trillion in new debt, up from $1.04 trillion in 2012, according to Standard & Poor’s Corp.

Diane Vazza, director of global fixed-income research at Standard & Poor’s, expects issuance to be flat to a little higher this year. “You’re coming off a very high level,” Vazza said. “Even flat is healthy issuance.”

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