Our Alice-in-Wonderland Bond Markets
We're in an Alice-in-Wonderland world of negative bond yields, with investors currently willing to pay for the privilege of lending money to governments. For a handful of top companies, this could be a once-in-a-lifetime opportunity to get money that's not just cheap, not even just free, but which actually pays them for borrowing.
Negative yields are becoming the new normal for nations. Last week, Finland auctioned five-year notes at a negative yield, selling 1 billion euros ($1.14 billion) of bonds at minus 0.017 percent. The five-year debt of least six other countries is trading at or below zero today:
Here's how a company might pull off the trick of getting paid to borrow. Earlier this week Apple Inc. sold 1.25 billion Swiss francs ($1.35 billion) of bonds. Part of the issue was 375 million francs of notes repayable in 2030, paying an interest rate of just 0.75 percent.
Suppose we tweak the terms of that issue. Let's shorten the maturity so investors get their money back after five years, not 15. That should let us cut the interest rate to, say, 0.1 percent. And let's put the price of the bond up to 101, so investors are paying a teensy bit more than face value. Voila! We've produced a bond for which investors will pay Apple about 0.01 percent interest for the security of lending to the world's biggest company with a market capitalization north of $700 billion. And why would they do that? Because it's still better than the 0.52 percent it costs them to lend to the Swiss government for the same length of time:
If that scenario sounds unlikely, consider the following chart that shows the yield on an existing bond issue from Swiss confectioner Nestle has dipped below zero in recent days:
Moreover, in the market for very short-dated borrowing, it seems some companies may already be achieving negative interest rates. BP Plc, the U.K. oil giant, pays less than zero to borrow euros for three months, according to an investor familiar with the borrowing who declined to be identified, in accordance with his company's policies. "We are active in the short-term market at prevailing rates," said David Nicholas, a spokesman for BP in London. He declined to comment on the terms of any specific transactions by the company.
If they can happen in the market for very short-term money, there's no reason negative rates can't also be achieved in the bond market where companies raise longer-term funding. So here's my challenge to the corporate treasurers of the world. Who wants to be first to tell your chief executive officer that you've pulled off a landmark bond transaction at negative yields? These rates won't be with us forever. Borrow now, or forever regret missing that opportunity to make your mark in the capital markets' history books.
(Corrects Apple's market capitalization in fourth paragraph.)
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