U.S. Producer Prices Rise 0.3% in October
U.S. producer prices rose 0.3% in October after a revised 1.4% increase in September, the Bureau of Labor Statistics reported Friday. That was a much smaller monthly rise in the prices domestic producers receive for their goods and services. Over the past year, though, those prices increased 6.5%, up from 6.3% in September. And once food, energy and trade services were excluded, prices rose 0.5% for the second month in a row.
The detail that matters for business lenders is how uneven those price changes were. Transportation and warehousing prices rose 2% in October. A supplier that can raise its prices may preserve its profit margin, while a customer locked into fixed prices may have to absorb the higher freight bill. Even a business that can pass on the increase may have to pay its suppliers before it collects from customers. Both situations can leave less cash available for interest payments in the meantime.
That matters for business development companies in the Fly High universe because they earn much of their income by lending to businesses. Many of those loans carry rates that reset with a short-term benchmark, so a higher benchmark can lift interest income. It can also raise the lender’s own borrowing costs and leave its borrowers with larger bills. The difference between what the lender earns and what it pays to fund the loan matters for earnings, and so does whether the borrower can keep paying. When a loan goes on nonaccrual, the lender generally stops recognizing interest it doubts it will collect.
Thursday’s Treasury figures put the 10-year yield at 5.10%, up from 4.98% on Tuesday. That adds context for businesses that need to refinance at longer maturities, while the rates on existing floating-rate loans depend on their own benchmarks. October’s slower headline price increase offers some relief, but steady gains in the measure excluding food, energy and trade services give us little reason to assume borrowers’ margins are recovering broadly. For dividend support, the next evidence we want is steady cash interest after funding costs. If more loans stop accruing interest, that would make the squeeze on borrowers visible in the earnings that support the payment.
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This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.