These Stocks Are Making the Most of Low Rates

For a long time, interest rates have stayed stubbornly low despite every indication that they would have to rise in the future. Now, once more, experts are anticipating the beginning of the end of the low-rate environment -- and smart companies are taking advantage of low rates before they disappear.

An important meeting
The Federal Reserve met yesterday and today for its regularly scheduled meeting to set monetary policy. For years, the Fed has kept interest rates as low as possible, as well as adding more fuel to the monetary stimulus pump by way of its quantitative easing programs.

But increasingly, signs are pointing to a possible end to this super-accommodative stance. Internal discord within the Fed itself shows that some members would prefer to see the latest round of quantitative easing end sooner than later. The U.S. dollar has plumbed new lows against most key currencies, as investors now see competing economies like the eurozone increasing rates at a faster pace than the U.S., which makes investing in euro-denominated assets more attractive than dollar-denominated ones, and thereby pressures foreign exchange rates. And although investors have been willing to accept guaranteed negative real returns on inflation-protected Treasury bonds recently, that willingness probably won't last forever -- especially if inflation continues to pick up steam.

5 companies doing the right thing
With that as background, several companies have made new bond offerings this week in hopes of locking in low rates before the Fed pulls away the punch bowl. Among them are:

  • Morgan Stanley (NYSE: MS  ) , which offered $4.5 billion in debt yesterday.
  • AT&T (NYSE: T  ) announced a $3 billion debt offering, with five- and 10-year securities planned to help it manage its $59 billion debt load.
  • Even in the lower-credit world of junk bonds, Sanmina-SCI (Nasdaq: SANM  ) and FelCor Lodging (NYSE: FCH  ) made big issuances of debt.

In addition, Bloomberg reported that leveraged buyout firms such as Blackstone Group (NYSE: BX  ) have saved hundreds of millions of dollars as their wholly owned private companies refinanced their debt at much lower rates during the first quarter.

Following the trend
Of course, these companies are far from the first to enjoy the benefits of low rates. Last summer, as rates fell toward historic lows, several large corporate borrowers rushed to lock in cheap financing.

For many companies, raising capital is a matter of survival. While many companies have huge amounts of free cash sitting on their balance sheets, others aren't in as strong a position financially. Yet unless cash-poor companies are willing to let their cash-rich competitors walk all over them in making strategic acquisitions or other asset purchases, they have to be able to join the bidding when buyout opportunities come up. Setting the stage now by locking in low rates just makes sense.

What goes down must go ...
In the meantime, if rates rise quickly enough, they may eventually hurt investors that buy these bonds from issuing companies. As long as you hold a bond to maturity, you won't see any capital loss, but the opportunity cost from locking up your money at what proves to be a low rate is a definite disadvantage. Moreover, if you invest in iShares iBoxx Investment Grade Corporate (NYSE: LQD  ) or SPDR Barclays High Yield (NYSE: JNK  ) , rising rates typically bring price declines for ETF and mutual fund shares -- losses that you won't necessarily recoup, since the funds often buy and sell bonds before they mature.

At the same time, rising rates aren't all bad. Savers have been punished by the Fed's low-rate stance, but if rates on CDs and other income-producing investments go up, then those investors will at least get a bit of relief.

Even if the Fed signals today that higher rates are coming, signs suggest that it probably won't act quickly. As a result, you may have some time before you have to worry about the full impact of higher rates on your finances. Nevertheless, doing some planning now could help prevent a much more painful outcome later.

Learn all the basics of financial planning with our 13 Steps to Investing Foolishly. It'll get you on track to a great financial plan in no time.

Fool contributor Dan Caplinger tries to make the most of every opportunity. He doesn't own shares of the companies mentioned in this article. AT&T is a Motley Fool Inside Value selection. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you the most.


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