The yield curve is steepening, which means corporate borrowing is getting more expensive even though the Federal Reserve Board has pushed short-term interest rates lower. Specifically, they have lowered the federal funds rate to 2% from 5.25% just 12 months ago. The motive was to stimulate the economy, but the cost of borrowing has not moved in lock-step as expected.

With so much uncertainty in our current business climate, companies that need to borrow money are paying higher interest rates now relative to the treasury rates than they were one year ago. As an example, high yield corporate bonds, sometimes referred to as junk bonds, currently average about an 8% premium over the US Treasuries, up from 5.3% from just a few months ago.

One of the major contributors to the rise in interest rates is because very few institutions actually want to loan money right now (that is why the experts say we are in a credit crunch). With an increase in businesses that are seeking a loan and a decrease in the number of banks and financial institutions willing to extend the loans, the rules of supply and demand tell us that the face value, or resell value, of these notes is dropping. Since the interest rates are inversely related to the value of the notes, this means interest rates on corporate debt are on the rise.

What does this mean to the business owners? It will continue to be hard to get a loan in at least near future. And, if you do get access to debt, most likely you will see your costs associated with servicing that debt increase in at least the near term.

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