Bonds have historically been one of the most known financial instrument used in daily trading all over the world. They are considered to be less volatile and safer investment decision than equities or derivatives. Until recently, nobody had thought that bond can cause economic recovery to slowdown. Bonds yield are at historically low levels and rush for bonds would do no good for anyone.
Companies nowadays are issuing bonds at dirt-cheap rates. Even lower-grade businesses can attract cash without dangling an oversized premium. What does management do with the dough? Best case, the money is used for internal improvement that boosts the bottom line — building a new plant, buying more efficient equipment, hiring workers, breaking into new markets. In this way, companies run better and so does the overall economy.
This should well be an easy way to get out of recession as companies are getting much needed money to do their business. But the problem is that the consumers are reluctant not to spend and unemployment rate is at distressing level. So, all the investment made by the company to strengthen its bottom line goes in vain. What should companies do then? Companies just can’t sit with the cash in bank and expect it to multiply of its own. So management frequently spends bond-buyers’ cash in ways that benefit shareholders and themselves, but are destructive to the broader economy’s health.
Such detrimental practices include share buybacks and dividend increases, which appease Wall Street by boosting earnings per (reduced) share and doling out cash that is — for now, at least — taxed at a low rate.
Using bond proceeds for mergers and acquisitions can be considered to be most useless practice for health of the economy. As an article in Martket Watch puts it:
"M&A does nothing to create jobs or motivate innovation. In fact, deals frequently lead to layoffs and consolidation. While this lets an individual company buy earnings growth when profits are scarce, spurring executive bonuses and securing their jobs, it shrinks the economic pie."
