This summer Bond Capital went back to school on interest rates. A 400bps increase in interest rates would hurt borrowers, including the government. A move of this magnitude is highly unlikely if you believe the bond market. It is pricing in an eventual 200-plus basis point increase in the Bank of Canada’s key lending rate before rates level off.
According to CNBC, the bond market did not follow the script many had expected this past summer, which would have seen interest rates rising on the back of a booming economy. Instead, COVID continues, yields on longer dated treasuries are falling, and that can be a warning on the economy.
On the one hand strategists point to a number of technical reasons for the surprise drop in yields. On the other hand, they also point out that inflation may force the Fed / BOC to move too far too fast to tighten policy, slowing the economy as a result. Amongst central bankers, it appears to us that Tiff Macklem is vying for most hawkish status with his New Zealand counterpart Governor Adrian Orr at the RBNZ and his Norwegian counterpart Governor Oystein Olsen at the NOK. All are worth watching over the next six months for interest rate guidance as Jay Powell at the US Fed continues to appear dovish.
Getting Paid to Borrow? While waves of COVID continue to rock the economy, liquidity in the financial system is strong. Governments continue to buoy assets with quantitative easing and the economy with low interest rates. The banking system maintains strong reserves at the moment, and now that we are learning to live with COVID the banks are re-entering the market. The market for debt capital is so accommodative that one could argue it is better than free.
It has rarely been such a good time to access liquidity for your business. A business should :
1. review your banking agreements and look to term out your operating line and other existing loans with longer term capital; 2. devise a 6 month emergency liquidity plan that you can call on if needed; and 3. focus on strengthening your balance sheet by asking your CFO to build a plan that will maximize your fixed charge coverage ratio.
Fourthly, call a friend like Bond Capital who is always happy to talk about balance sheet management and balance sheet strategy.
About Bond Capital Bond Capital is an award-winning private credit fund. As a direct lender, Bond Capital provides advice and money across the entire risk curve. Bond Capital structured credit financing enables business owners to maintain control ownership in exchange for yield and capital preservation. Across multiple cycles and for nearly 20 years, Bond Capital has advanced secured investment quality credit to lower middle market companies throughout North America.