Wednesday, February 11, 2015

More Insanity In Global Bond Yields: Corporate Bonds Go Negative

Governments are not the only entities now able to borrow at negative yields. Corporate giant Nestle recently issued a bond with an expiration in October 2016 and the interest rate on the bond locked in below zero. This means investors are paying Nestle to take their money. 

This may only be the beginning. Above Avalon discussed this week what is now taking place in the bond market for Apple:

"Apple just raised $1.35 billion of Swiss-franc denominated debt in two tranches (0.28% and 0.74% implied yields), according to the WSJ, Apple is raising debt to fund its capital return program. In what can only be described as being at the right place at the right time, Apple is essentially getting paid to raise debt. 
Apple may enter currency swaps to effectively convert Swiss Franc-denominated notes to U.S. dollar-denominated debt, which would increase the effective "cost" of the debt. Even taking this cost into consideration, Apple is in a position to earn a small profit by issuing debt. By raising debt, Apple is able to use borrowed cash to buy back AAPL shares, thereby saving on dividend expense. All else equal, and assuming an estimated $13 million after tax currency swap cost, Apple would make a profit of $1 million by raising $1 billion of debt at a 0.28% interest rate."
Unlike some of the bankrupt governments borrowing at today's insane yields, I have no doubt Apple has the ability to pay back this debt in the future (the same goes for Nestle). This makes these bond sales far less ridiculous than a Japanese 10 year bond yielding 0.30% because a 5th grader with a calculator can clearly figure out Japan will never, ever pay back their debt without massive devaluation and/or default. Apple has a cash hoard larger than the total GDP of some countries. Japan is beyond bankrupt in every sense of the word.

However, it is only at the peak of a 80 year debt super cycle mega bubble that you will see investors pay companies to hold their money. We have arrived at that peak.

For more see: A Look Behind The $57 Trillion Increase In Global Debt Since 2007

No comments:

Post a Comment