Friday, May 20, 2011

What Does The Current U.S. Corporate Rush To Borrow Money Tell You?

It tells you they anticipate higher interest rates once the U.S. Fed in June ends its massive stimulus plan and they want to secure all the cheap money they can now.

Many of these giant companies are already cash rich. Google, Johnson & Johnson, Texas Instruments and many others are borrowing money they seemingly don't need. But if interest rates jump sharply, this money they borrow now will be inexpensively available to them, already in their corporate coffers. And if rampant inflation kicks in, they can pay that money back in ever cheaper dollars.

Don't assume they will necessarily invest it in the U.S. They will put it to work within their business plans and to get the highest rates of return they can to benefit their shareholders. China, South Korea, Germany and other stable and growing economies may be among the fortunate recipients.

If you believe as they and I do that interest rates will be rising, and you are in the process of borrowing money, you would be wise to get your transaction done now, preferably using a long term fixed rate.

For more details, please see "Companies Rush to Borrow," The Wall Street Journal, 5/18/11

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