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What Drove VMware’s Fiscal 2Q17 Results?

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Part 14
What Drove VMware’s Fiscal 2Q17 Results? PART 14 OF 20

Could VMware and Its Peers See Increased Activity in the Bond Market?

Corporate bond market crossed the $1 trillion mark

Earlier in the series, we discussed VMware’s (VMW) recent bond offering. We also noted that the tech sector’s cash reserves and debt soared in 2016. This year marked the sixth straight year when companies sold more than $1 trillion of bonds in the corporate bond market and as the chart below shows, these sales occurred faster this year than ever before.

Amazon (AMZN) held a $16 billion bond sale in August, which pushed the bond market to cross the $1 trillion mark. In 2016, low interest rates prompted technology companies to take the debt route and rely on leverage to save on taxes.

Could VMware and Its Peers See Increased Activity in the Bond Market?

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Factors impacting corporate bond sales

Considering the current scenario, an increase in bond issuances this year is perplexing. The Federal Reserve started to gradually increase interest rates in December 2015 and so far, it has delivered four quarter-point increases.

The benchmark interest rate range is 1.00%–1.25%. In 2017, the Fed’s target is to have one more quarter-point interest rate hike. The rise in short-term interest rates, the uncertainty hovering around potential tax reforms, and potential trade wars indicated a drop in bond issuances this year.

Higher stock prices and improved corporate earnings have subdued the urge for companies to grow through M&A, which pointed to a potential drop in bond issuances this year. However, in 2017 year-to-date, this trend has not yet happened. Industry analysts are skeptical as to how long this increase in bond sales under the Trump administration could last.

Henry Peabody, a money manager at investment management firm Eaton Vance, noted, “The market is underpricing the risk that the Federal Reserve is a little bit more aggressive than the front end is forecasting.”

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