July 10, 2023
☀️ Welcome back. Today we look at what’s in store for the economy as the three-year pause in student loan payments comes to an end; and how the Fed’s rate hikes have reshaped the way companies borrow money. Let’s go.
Today's newsletter is 1,117 words, 4.5 minutes.
1 big thing: Student loan cliff ahead
There's a big economic shock coming this fall for both the economy and millions of American households — the resumption of student loan payments, Emily writes.
Why it matters: For millions of individuals that means real and often painful cuts to spending — cuts that will translate to a slowdown for the economy overall.
- The pullback will ease inflation on the margins as the Fed tries to navigate a soft landing — but some economists fear it could push the U.S. economy toward recession.
- "This is definitely a cause for concern," says Jesse Wheeler, a senior economist at Morning Consult. "There are a lot of headwinds already in place with the economy."
Zoom out: Americans with student loan debt tend to be younger, with lower incomes — they're spending a higher share of their income already, so an additional monthly payment will hurt.
- Overall, the resumption of student loan payments will pull $70 billion a year out of the economy, according to an estimate from Moody's Analytics.
That number is higher than initially expected because the Supreme Court shot down the Biden administration's debt forgiveness plan earlier this month.
- If the plan had been upheld, the end of the payment pause would have amounted to a 0.2% reduction in real personal consumption expenditures in 2023, per an analysis from Moody's Analytics.
- Now with the court's decision, and so many folks not seeing their debt erased, the spending reduction will be about 0.4%, Moody's estimates.
The big picture: The coming student loan cliff is the latest in a string of withdrawals of pandemic-era supports. These include the end of both stimulus checks and child care tax credits, as well as the pullback on SNAP benefits and Medicaid supports.
- The IMF recently said that for the U.S. to truly tame inflation, the government will need to pull fiscal levers — like raising taxes — to suck some money out of the economy.
- While such moves are a political nonstarter in the U.S., rolling back these COVID-era supports is a backdoor move in that direction.
What they're saying: The U.S. economy is massive, so the impact of student loan payments on GDP will likely be marginal, says Bernard Yaros, an economist at Moody's Analytics.
- While less spending does reduce inflation, this decline is "not going to solve our inflation problem. Whatsoever," he says.
- Still, others are less sanguine. "I'm more worried about raising recession odds," right as the Fed is trying to come in for a soft landing, says Michael Madowitz, director of macroeconomic policy at Equitable Growth.
The bottom line: The Supreme Court's decision to overturn the Biden plan on student loan forgiveness complicates an already tricky situation for the U.S. economy.
2. Catch up quick
3. Charted: Jobs record for women
The share of women in their prime working years (ages 25-54) who are either working or looking for work is at a record high of 77.8% for the third consecutive month, per the jobs data out Friday, Emily writes.
- Why it matters: After all the doom and gloom talk about women not coming back to the labor force, you love to see it.
4. How to get cheaper debt
The high-yield bond market — where companies with lower credit ratings borrow money — is showing signs of life after all but shutting down last year. But in this new era of expensive money, many companies are doing deals a little differently in order to save on their interest costs, Axios' Kate Marino writes.
State of play: A record share of speculative-grade deals placed this year have shorter maturities and stronger collateral packages.
Why it matters: "This is a whole new playbook for all these debt borrowers. And everybody's going to have to get very creative in what they do to get through the next couple of years," Oleg Melentyev, credit strategist at BofA Global Research, tells Axios.
Catch up fast: Think of last year as a period of rapidly growing sticker shock that kept most borrowers away.
- Now they’re coming around to the likelihood of a "higher for longer" environment and taking the plunge. New high-yield bond issuance is up 38% in the first half of the year compared with the first half of 2022, according to PitchBook LCD.
But, but, but: A sharply higher share of companies are placing secured bonds instead of the unsecured debt that was more commonplace before the Fed's rate hiking cycle. The chart above shows the jump over the last few quarters.
- What that means: With secured bonds, the bondholders have a lien on the company's actual assets. That lowers the risk that bondholders don't get paid back, since they can lay claim to the assets themselves; in return, they charge a lower interest rate.
- When rates were at rock-bottom levels, fewer companies felt the need to pony up assets — which strips them of future flexibility with said assets —in order to obtain affordable debt.
- These days, it seems worth it: Companies can typically save anywhere from 1 to 1.5 percentage points in annual interest by doing a secured deal rather than an unsecured one, estimates Melentyev.
Also: The average length to maturity for new high-yield deals this year is at a record low — shorter than it was in any other quarter since LCD began tracking the data in 2005.
- Again, a similar concept: shorter borrowing time, lower cost of capital.
- Melentyev estimates that issuing a 5-year bond instead of an 8-year bond can save a high-yield borrower of middling credit quality about 1.7 percentage points on average.
The bottom line: The Fed's steep and rapid succession of rate hikes is reshaping which companies borrow — and how they do it. But the initial knee-jerk freeze is probably over, as corporate leaders get used to the new normal.
5. No refinancing cliff yet
Though companies have begun returning to the high-yield bond market to raise funds, don’t expect a huge rush any time soon, Kate writes.
The big picture: That’s because of the pandemic-era “pull-forward” effect. Borrowing costs were so low in 2020 and 2021 that just about every high-yield-rated company addressed its refinancing needs during those years.
- That blitz left little in the way of corporate bond maturities that need to be addressed over the next few years, as the chart above shows.
Between the lines: As credit tightens, some companies can’t afford to refinance — that’s one reason defaults and bankruptcies have already started rising.
- And if rates remain elevated into 2025 when refinancing needs to pick up, then we might see an even bigger jump in defaults.
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Today's Axios Markets was edited by Kate Marino and copy edited by Mickey Meece.