US Corporate debt spreads increase

Cost of debt for US companies is going up

May 23, 2022 3:16 IST | India Infoline News Service
Corporate debt spreads in United States increase after quantitative tightening by US Federal Reserve. Corporate debt spread is the extra interest rate that companies have to pay on their debt, over the risk free rate of interest. This increase in spread will further increase the stress on US companies.

US economy is struggling with high inflation rate. This high inflation rate has been caused by Covid lockdowns and the ongoing war in Ukraine. To control this inflation, US Federal Reserve, the US central bank, has started increasing interest rates. It has also started reducing money supply by selling the bonds it holds. In the first week of May it increased interest rate by 0.5%.  It is expected to raise interest rate again in June.

Increase in interest rate is likely to slowdown the US economy. Slowdown in the US economy will increase credit risk of US companies. Credit risk is the risk of default by a company on its debt. This expected increase in credit risk is getting reflected in increase in corporate debt spread. More the credit risk of a company, more the debt spread that it has to pay.

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