Blue-chip companies are spending more money on US dollar bond interest payments, and even Federal Reserve rate cuts this year won’t immediately reverse the trend.

High-grade issuers are poised to pay around $420 billion in coupons this year, up 18% from last year, according to a note by JPMorgan Chase & Co. That increase is three times the rate of revenue growth for companies in the S&P 500 Index during the second quarter - suggesting the trend is weighing on profit growth for many companies.

The difference between yields on new bonds and maturing bonds so far this year for companies in the US investment-grade market averages about 2.01 percentage points, or 201 basis points, data compiled by Bloomberg show. The higher costs are likely to persist for several more quarters, according to the JPMorgan report.

“Even with some Fed cuts, issuers will still on average be paying more for new debt versus maturing debt,” JPMorgan strategist Nathaniel Rosenbaum wrote in an email.

Fed policymakers are due to meet next week, and interest-rate traders broadly expect them to start cutting rates at that meeting. But for many high-grade companies, that won’t translate to lower bond expenses right away because their maturing debt often comes from the era of low interest rates, and the Fed tightening campaign that started in 2022 has lifted current borrowing costs so much from those levels.

Some companies have taken steps to keep costs manageable, with rate relief solutions including fine-tuning hedging strategies and shifting into debt that matures sooner.

“Now that rates are higher, we’ve tended to have more shorter-dated debt,” said Tim Arndt, chief financial officer at Prologis Inc., a real estate investment trust that focuses on warehouses.

Paying more interest can be punishing for companies, leaving them with less money for items like business investments and wages. For high-grade companies, the interest coverage ratio - which compares a measure of earnings with interest expenses - has come down since 2022, indicating a slight weakening in corporate credit quality, according to a report from S&P Global.

Rising interest costs also make acquisitions more expensive, which can limit companies’ ability to grow, move into adjacent business lines or cut operational expenses through efficiencies.

“You have to ask yourself the question, is it worth it for me to do those types of things given the fact that I have to pay interest, which is higher than it has been in the past?,” said Raj Shah, co-head of US investment grade bonds at PGIM Fixed Income.

Overall, though, the higher interest expenses appear to be frustrating rather than debilitating. Many companies were accustomed to rock-bottom interest rates - known as “ZIRP,” for Zero Interest Rate Policy - for such a long time.

Looking ahead, the extent and frequency of the Fed’s rate cuts are center stage for companies and investors. An inflation report on Wednesday dampened odds of a cut beyond 25 basis points among traders.

If the Fed does cut rates more aggressively, it will probably be because economic growth is slowing fast, said Daniel Sorid, head of U.S. investment grade credit strategy at Citigroup. That would suggest layoffs, lower demand and weaker corporate profits ahead - all of which would hit credit, he said.

In the meantime, investors have been reinvesting interest payments back into the market, driving demand and keeping risk premiums relatively tight. They are getting more money back than they can invest: Bank of America in June forecast total high-grade corporate coupon payments of $220 billion in the second half of 2024, while net issuance will probably be around $89 billion. In that way, any growth in coupon payments could help support corporate bond valuations.

“That eliminates one more thing for investors to worry about,” said Travis King, head of US investment grade corporates at Voya Investment Management.

  - Bloomberg