Ugh, now Forbes Magazine is writing about
Swaps And Options: The Next Investor Time Bombs?
Now, this is SCARY:
***Curtis Hesler, editor of Professional Timing Service, is concerned about interest-rate swaps and the resulting vulnerability of companies that have traded their long-term debt for shorter maturities. With interest rates on short-term debt much lower than those for longer term debt, companies with good credit quality are entering swaps in which they trade their higher (generally fixed) rate obligations for those with a lower (but generally variable) rate at the short end of the yield curve. Bill Gross, fund manager at PIMCO, criticized General Electric (nyse: GE - news - people ) earlier this year for placing so much of its debt in short-term commercial paper.
While swapping lowers borrowing costs today, Hesler fears that if the Fed begins to raise short-term rates, it will dramatically increase financing costs for these companies, perhaps causing some to default, which could send waves through credit markets and the economy. To be certain, says Hesler, it would significantly reduce earnings.
"This means that short-term interest rates are much more important to the U.S. corporate bottom line than they were ten years ago," says Hesler. Hesler warns that these swaps are generally not disclosed to investors but could affect a large number of companies, especially banks.***
forbes.com |
