Most treasurers probably headed into 2004 with a cash management plan based on one key assumption: U.S. interest rates would be heading upward–probably to top 5% at some point during the year. That held all the usual implications: higher borrowing costs, higher potential returns on fixed-income investments and a healthier economic climate.
Instead, rates defied expectations and headed lower during the first quarter. While the consensus forecast called for the 10-year Treasury yield to move up to 4.8% by midyear and 5.2% by year end, so far it has been headed in reverse. By March 15, it had slipped to 3.77%, from 4.26% at the end of 2003, as the markets' faith in the economic rebound took some hits, particularly from the anemic monthly gains in employment and renewed concerns about terrorism in the wake of the Madrid train bombing.
Are treasurers in a position to take advantage of the turn of events? Whether a corporate borrowing surge will materialize is uncertain. Despite forecasts for a 10% rise in capital spending this year and signs that M&A activity is picking up, John Lonski, chief economist at Moody's Investors Service, says data that shows non-financial companies with high cash flows relative to their outlays implies that corporate borrowing may not take off in a big way.
Recommended For You
But Diane Vazza, a managing director at Standard & Poor's Corp., notes that the heavy corporate debt issuance in 2002 and 2003 primarily reflected companies refinancing high coupon debt or bank loans. "We still see it as an opportunity," Vazza says, for "any company that needs to fund capital expenditures"–or for that matter, any that missed out on refinancing for whatever reason last year.
Jim Glassman, senior economist at JPMorgan Chase, suggests companies could borrow now in anticipation of future capital requirements. "Why would you wait until you need the money, when everyone else will need the money?" he asks. "If you think we are coming into a good expansion and a long one, it would be sensible to pick this moment to do some of your advance funding."
And the chance to borrow at current rates might not last forever, economists warn. Given that the weakness in the economy comes as a bit of a surprise, the fact that the Federal Reserve hasn't pulled the switch yet on higher rates is a blessing–although recently Federal Reserve Chairman Alan Greenspan ominously mouthed concern over the enormous deficits the Bush Administration tax cuts could create. Some economists still expect rates to approach 5% if the economy gets back some of the momentum it seemed to have in the fourth quarter of 2003. "There's still a good deal of confidence out there that despite some disappointing news on economic activity, this is going to turn out to be a fairly lively year for the U.S. economy, and that ought to eventually push interest rates higher," says Moody's Lonski. He expects the 10-year Treasury yield to get back up to 4.75% by year end.
However, other economists, like Josh Feinman, the chief economist at Deutsche Asset Management, contend that the current sub-2% inflation means real rates aren't that low anyway and could limit the rise in rates even if the economy picks up significantly. "Even when this economy is back to full employment, I would think the 10-year doesn't have to be more than low 5s," Feinman says.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
