There is a rather interesting detail regarding US companies that is often overlooked in the market. Despite high interest rates, the ratio of the net interest burden to Gross Value Added (GVA) for non-financial US companies stands at approximately 1.2%. Viewed against a long historical series, this ratio is quite low. At first glance, this seems odd: the Fed has raised rates aggressively since 2022, yet why does the net interest burden of companies remain so low?
A key reason for this is that current corporate balance sheets are largely the product of the low-interest-rate environment of 2020–2021. During that period, companies took on long-term, fixed-rate debt at very low rates. Although the Fed subsequently raised rates above 5%, a 10-year bond issued in 2021 at a 2.5% rate continues to pay 2.5% interest. The coupon on an existing bond does not get repriced overnight simply because the policy rate has risen to 4%.
Then there is the other side of the equation: corporate cash holdings. The term "net interest" is crucial here. Roughly speaking, the net interest burden is calculated by subtracting interest income from interest expenses. While existing corporate debt does not immediately reprice in a high-interest-rate environment, the cash and short-term assets on balance sheets have begun to generate higher interest income. In other words, while this high-interest environment increases borrowing costs on one hand, it simultaneously boosts interest income for companies holding cash.
Therefore, it would be incorrect to interpret the ~1.2% ratio we see today as an indication that US companies are unaffected by high interest rates. The real issue is that the impact of the interest rate shock is reflected in corporate balance sheets with a lag. As older, low-interest bonds mature, companies will be forced to refinance them at higher rates. For instance, if a company that borrowed at 2.5% in 2021 has to renew that same debt today at 5–6%, the resulting increase in interest expenses could be substantial. Consequently, there is no guarantee that the interest burden—which appears low today—will remain at the same level in the future.
This is because the net interest burden we currently observe at around 1.2% is not merely a result of today’s interest rates; it is also a consequence of the rates at which companies borrowed in the past, the amounts they borrowed, and the duration for which they locked in that debt.
