Another Bond Called
A few days ago, it was Fannie Mae 6.5% bonds being called. No great surprise on that. Now, some 5.5% Ford bonds due next year are being called. What's going on? If you are expecting interest rates to rise dramatically, I don't think that you call existing bonds. This almost looks like a dramatic reduction in interest rates is coming. Or am I missing something? Or is it just that Ford is flush with cash and doesn't need to borrow money? Or are they able to borrow so much so cheaply between now and next year that it makes sense to call the bond?
I think you've got it backwards. It's likely that Ford is locking in low rates now. They're certainly not flush with cash. I suspect that they see rising rates in the future and are calling in their debts now to refinance to lock in longer term lower interest rates to prepare for a future of higher inflation and higher interest rates.
ReplyDeleteFord's timing has been pretty good on the macroeconomic scene; if you remember they refinanced their plants just in time to have cash to make it through the Great Recession. So what they're doing doesn't make me comfortable.
I did suggest that they were borrowing now when interest rates are low in the last sentence--and that fits with what Richard said. I guess that I better just hang on the cash, and wait until interest rates get absurdly high to buy Treasuries.
ReplyDeleteAny way you cut it, we're still in a very perilous time. You might check out the similarities with the Great Depression. Megan McArdle touched on them in two articles (http://www.theatlantic.com/business/archive/2010/04/greece-and-the-euro-going-going/39644/ and http://www.businessinsider.com/5-terrifying-parallels-between-whats-going-on-now-and-the-great-depression-2010-4).
ReplyDeleteWhen all this started I remembered from my long-ago college classes discussion on economics some discussion of the Great Depression, so I started reading some stuff from the Fed about the responses. Frankly, it's terrifying stuff and Megan has only briefly skimmed it. Wheelock's general audience paper (http://research.stlouisfed.org/publications/review/08/05/Wheelock.pdf) outlines more of the similarities and is based on another report he wrote that's even darker and much more technical.
The short take is that housing induced fiscal crises tend to metastasize into sovereign debt crises and the whole system takes decades to clear. We're likely nowhere near the end of this crunch and as a place to be, Clayton, you may bless your stars that you're in the job you're in now.
Maybe Keynes was wrong: the problem isn't sticky wages, it's sticky debt. If you've got fixed amounts of debt you're very limited on how much your wages can go down before you hit a cliff, default, and cause your creditors enough pain that they need to stiff their other clients, which means more of them default, etc. Too much leverage is a bad thing, and as bad as bank leverage is in the states, it's many times worse in Europe.