How has the US economy managed to avoid a recession amid historic rate hikes by the Federal Reserve? According to Jonny Fine, who heads up Goldman Sachs’ Investment Grade Syndicate in the Americas, it comes down to how companies and consumers positioned themselves back when rates were de minimis.
Companies did a good job of issuing long-term bonds when it was attractive to do so, he says. “When we had very low interest rates, around 25% of all issuance in the US corporate bond market had a 20-year or longer maturity,” Fine points out.
As a result, relatively little debt is coming due in the next few year, he explains – meaning that “there’s no cliff effect, and no wall of refinancing that investment-grade corporates have ahead of them.”
Meanwhile, US consumers have shifted away from adjustable-rate mortgages; instead, the 30-year fixed rate mortgage has become the “instrument of choice for the US homeowner,” Fine notes. “This is terrific, because it’s meant that the US consumer has become less rate-sensitive to the changes that the Fed has been putting into place since the beginning of last year.”
Interestingly, Fine says that the US is relatively unique in its lack of sensitivity to short-term rates. “The US has numerous competitive advantages, including the structure of its bond market and the structure of its mortgage market,” which make the economy “less rate-sensitive than most economies around the world.”
While acknowledging that rate hikes can have a lagging effect, Fine believes that American companies and consumers remain in a relatively strong position.
“I’m optimistic as to what the next 12 to 24 months may bring for the US economy,” he concludes.