Risk Tradeoffs

Economic business risks, that is.

Companies in the US and Europe are buying back bonds to reduce the cash piles they built up earlier this year, signaling expectations for more stable economic times ahead.

“The world still isn’t perfect, but there’s more visibility. A lot of companies who have overfunded, they sat there after a few months and said we don’t actually need all of this money,” said Frazer Ross, a regional head for Deutsche Bank’s investment-grade debt syndicate. “It’s like they took out an insurance policy, but now it’s too costly.”

Shrinking their cash cushion exposes those companies to downturn risk or market—loss of customers—risk in the near term, but debt always is more expensive than no debt. Reducing their debt strengthens companies in the middle- and longer-term, both from reduced cost outlays in the form of interest (and principle) payments and by strengthening those companies’ credit ratings in the event they need to borrow against a later market or business downturn or to acquire capital for increased R&D or capital refurbishment or expansion.

In general, increasing short-term risk—according to deliberate planning—in favor of reducing longer-term risk is a good move.

These guys obviously are seeing the light beyond the end of the tunnel.

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