Corporate bonds

Corporate bonds are back in fashion despite rising interest rates

Corporate bonds are back in fashion as rising interest rates and uncertain economic conditions push companies to find alternatives to bank financing.

Photo: RNZ / Angus Dreaver

The value of debt raised in the NZX bond market rose 8% in the year ended March to nearly $45 billion, driven mainly by a 47% increase in wholesale debt and a 27% increase in the value of green bonds.

The recovery in demand was widely anticipated, given rising interest rates and strong annual inflation growth in New Zealand and other major global markets.

Annual inflation hit a 30-year high of 6.9% last week, making it much more certain that the Reserve Bank will continue to raise the official exchange rate, perhaps another 50 basis points to 2% next month.

Claire Matthews, an associate professor at Massey University and a banking expert, said bonds tend to change mode depending on the direction of interest rates.

But she added that there were other reasons companies were looking to the bond market for financing.

“It may be a more expensive source of finance, but it can be considered a better source of finance than, for example, issuing shares, which comes with a lot of problems.”

She said banks may also struggle to meet market demand for business finance.

“So that’s definitely one of the things that can be the root of the problem, in that if banks aren’t able to access the funds that they need to be able to lend to businesses, maybe that’s why companies are going to the bond market instead.”

Matthews said investors need to do their due diligence, but less if investing through a fund manager.

“By buying a bond, they are lending to that business to some degree and should be aware of that.”