People have argued for years about whether the bond market is a bubble waiting to burst or will continue to push rates down to historic lows. Regardless of prevailing opinion, though, many companies definitely believe that now's the time to sell bonds, as they rush to issue debt at amazingly low rates before they start to rise again.
Taking advantage of demand
It's amazing just how much things have changed in the past two years. During the fall of 2008, companies were completely unable to tap the credit markets at any price. With all the fears of defaulting companies, no one wanted to take on the risk of parting with their cold, hard cash. Even though the Federal Reserve pushed interest rates as low as they could go, it took a trillion-dollar stimulus package and other unprecedented government action to jump-start lending activity.
Now, though, the credit markets are flying high, and investors are in a frenzy to buy bonds. So far this year, billions of dollars have flowed out of stock mutual funds into bond funds, as steadily dropping yields have boosted bond fund performance while stocks continue to languish near the break-even point for 2010.
Smart companies understand that these trends run in cycles and that it pays to take advantage of good deals when you can get them. That's why corporate bond issuance has picked up substantially recently. For instance, here are some of the deals that have gone through so far this month:
- Blue-chip issuers with extremely good credit are taking advantage of extraordinarily tight spreads over Treasury rates to reduce their borrowing costs. For instance, Johnson & Johnson
(NYSE: JNJ)issued $1.1 billion in 10-year and 30-year bonds at spreads of 0.43 and 0.68 percentage points above comparable-length Treasuries. IBM (NYSE: IBM)took that a step further, issuing $1.5 billion in three-year debt at a cost of just 1%.
- Energy companies are using the opportunity in connection with costs and opportunities related to the Gulf oil spill. Anadarko Petroleum
(NYSE: APC)issued $2 billion in seven-year bonds at 6.38% to help finance liability from the spill. Apache (NYSE: APA), meanwhile, needed money to buy assets from BP, so it sold $1.5 billion in 30-year bonds at a cost of just 5.17%; investors bid $5 billion in orders for the offering.
- Even battered financials are finding buyers in the bond market. Bank of America
(NYSE: BAC)and HSBC (NYSE: HBC)made billion-dollar offerings of debt at between 2.25 and 2.3 percentage points above Treasuries. Ratings agency Moody's (NYSE: MCO)sold $500 million in 10-year bonds at a 3-percentage-point premium to Treasuries, yielding 5.58%.
Details aside, the key is that across the economy, many corporate borrowers are cashing in on the bond market's surge. That raises a big question for the investors who are buying that debt: if companies are so eager to issue new bonds, should you be just as eager to buy them?
The other side of the story
Some believe that these debt-issuing companies are swimming against a bigger trend. According to a B of A/Merrill Lynch analyst, even though Treasury debt will expand by $1.2 trillion in 2010, net supplies of corporate, mortgage, and consumer debt may well shrink by an even greater amount, $1.3 trillion. If that's right, then companies could well have even better opportunities to tap a supply-starved market.
But over the long haul, it won't make a huge difference for issuers whether they hit the absolute bottom in terms of borrowing costs. It's clear that many companies are just happy that the credit markets are functioning again and that they can get the money they need.
The lesson for you to take from this is that there are always two sides to every investment you make. Even when emotions run wild and everyone's flocking to a particular stock or other investment, you'll always find someone willing to sell. Stop and ask yourself why companies are selling debt into the bond market's big rally, and the answers may convince you that bonds are far riskier than most are giving them credit for.
Who'll be next to cash in on the bond market bubble? Russ Krull looks at a bond bonanza for these stocks.
Fool contributor Dan Caplinger loves to blow bubbles with his daughter. He doesn't own shares of the companies mentioned above. Moody's is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. Johnson & Johnson is a Motley Fool Income Investor selection. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson and writing covered calls on Moody's. Try any of our Foolish newsletters today, free for 30 days. You'll never see the Fool's disclosure policy with a popped bubble-gum bubble all over its face.