AMERICAS: Companies Lock in Rates As US Economy Surges, THE

Global Finance, Dec 2003 by Platt, Gordon

US corporations are prepaying outstanding bonds and locking in current low interest rates and signs of strength in the economy, analysts say.

The 7.2% rise in US gross domestic product in the third quarter and employment gains in September and October make it clear that the next move in rates will be upward, economists say.They add, however, that the Federal Reserve will be patient and likely will wait months longer before tightening monetary policy.

Meanwhile, companies are issuing large amounts of bonds to replace higher-cost outstanding issues before market rates rise further.

US high-yield corporate bond issues totaled $10.2 billion in October, nearly five times the level in the same month of last year, according to Vermont-based KDP Investment Advisors.

"With output gaps wide and inflation lower than desired, there is no need for policymakers to respond quickly to faster global growth "says John Lipsky, chief economist at JPMorgan Chase in New York.

"Rather, policy tightening will become appropriate when economies are closer to full capacity than at present," Lipsky says. "Thus, implicit market expectations that the Federal Reserve will initiate rate hikes during next year's first and second quarters are likely to be premature."

While signs of improvement in the labor market are becoming more broadbased, the data are still far from enough to justify a Fed rate hike anytime soon, says Lam Rhame, economist at Brown Brothers Harriman in New York.

"The Fed won't respond to job growth with higher rates until it thinks labormarket pressures are so strong they threaten to ignite inflation," Rhame says.

Surging profits and investment suggest that the jobless phase of recovery is nearing an end, says Robert V. DiClemente, chief US economist at Citigroup in New York.

"There are increasing signs in incoming data that US recovery is at or very near a self-feeding stage," DiClemente says.

Rising ortlers for nondctense capital goods include a tailwind of rising backlogs, he says. A pattern of upward revisions accompanying strong data is characteristic of cyclical turning points, he adds.

Confidence in the durability of the recovery is not yet sufficient, however, for the Fed to abandon its pledge to remain accommodative for "a considerable period," he says.