The Independent

Corporate Bonds

Jamie Dimon
Jamie Dimon
James "Jamie" Dimon, born March 13, 1956, is an American business executive. He is the current chairman, president and chief executive of JPMorgan Chase, and previously served as a Class A director of the Board of Directors of the New York Federal Reserve, a three year term which started January 2007. | Jamie Dimon, Jpmorgan Chase, Bank,

Another Bubble Looming?

Corporations, both large and small, have numerous ways of raising capital; one such way is to issue corporate bonds. These bonds serve as an investment vehicle for private investors and in theory allows the corporation to expand their business, manage "cash-flows", and eventually pay the investor off on the bond's maturity date. In addition, investors also receive interest payments (coupon payments), and the interest rates on these bonds are much less than a traditional loan, so the corporation wins out also.

The corporate bond market has expanded greatly since their inception during the early 1980s, both domestically and internationally, and they are inexplicable tied to one another like the derivatives market was and still is; a major factor in the market collapse of 2008.

Not to mention the tremendous amount of money big financial firms have attached to credit default swap indexes that track corporate bonds, and the market interference they are running by engaging in these massive bets on the corporate bond market.

Outstanding principal in corporate bonds rages towards $9 trillion dollars, and with government's meddling so much in our economy; investors are driving the bond market forward, because corporate bonds deliver higher interest rates than other safer government investments. This is the usual course of policy from our Federal Reserve, who over the past forty years, have made safe investments from the government deliver less and less interest.

The prevailing theory is that corporate bonds are good for the market, especially to engage hiring when credit is tight. But, if it is true that corporate bonds spurn job creation, why is the employment rate essentially unchanged, although the corporate loan market has grown exponentially over the same time unemployment has risen, or remained abnormally high?

During tough economic times, when credit is not available, issuing corporate bonds make sense. But if corporations are sitting on large financial reserves, why has this corporate bond market grown so aggressively and why is it experiencing bubble/burst behaviors?

Once government raises the rates on government bonds, shrinking the margin of profit on these corporate bonds, while offering a much safer investment for investors - will investors flee and cause the corporate bond market to collapse?

I fear that might be the case, as the corporate bond market lacks any credible regulation, has grown to systematic significant levels, which will undoubtedly require government intervention when it bursts, and the use again of our unwilling tax dollars to fix the problem.

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Updated Aug 12, 2017 12:13 PM EDT | More details

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