Please ensure Javascript is enabled for purposes of website accessibility

Bond Investors Got a Fever -- and the Only Prescription Is More Yield

By Jacob Roche – Updated Apr 6, 2017 at 11:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Desperate for yield, bond investors start taking anything they can get.

Johnson & Johnson (NYSE: JNJ) recently broke a new record -- but it wasn't for the strongest Tylenol in history. J&J has now posted the lowest yields ever on a corporate 10-year and 30-year bond -- 2.95% and 4.50% respectively. For comparison's sake, that's 21 and 56 basis points more than comparable Treasury bonds.

This might be just an extraneous data point, not representative of corporate bonds as a whole. But a host of other companies -- not all necessarily even AA-rated -- have also recently issued bonds at absurdly low yields:

Stock

Rating

Term

Yield

Comparable Treasury Yield

Yield spread (in basis points)

Johnson & Johnson

AAA

10-year

3.15%

2.74%

41

 

AAA

30-year

4.63%

3.94%

69

McDonald's (NYSE: MCD)

A

10-year

3.50%

2.94%

56

   

30-year

4.875%

3.98%

89.5

International Business Machines (NYSE: IBM)

A+

3-year

1.00%

0.85%

15

Wal-Mart (NYSE: WMT)

AA

5-year

2.25%

1.82%

43

   

10-year

3.625%

3.00%

62.5

   

30-year

4.875%

3.94%

93.5

Campbell Soup (NYSE: CPB)

A

7-year

3.1%

2.45%

65

What's craziest about these yields? Their comparable Treasuries sold at higher yields only a few weeks ago -- in some cases, a few days ago. Did something change in the last few weeks to make Johnson & Johnson as safe an investment now as the United States government was two weeks ago? Doubtful.

The U.S. government issues bonds in its own currency, and even if it has to trigger Zimbabwe-esque inflation, it can always print money or raise taxes to meet payments. J&J doesn't have that luxury. If it should suffer through another unforeseen scandal on the magnitude of the 1982 Tylenol scare, its bond investors will have quite the headache.

Perhaps, in this brave new world that has such bailouts in it, one could argue that any big, well-rated company is somehow implicitly backstopped by the taxpayer, and thus just as risk-free as a Treasury. But really, will anyone honestly tell me that Campbell Soup is too big to fail?

Here's the real truth: The lower yields go, the more a single basis point matters. If Treasury yields all go to zero, a AAA-rated corporate bond with a 0.05% yield will start to look attractive. But those of you who don't see a 0% long bond scenario anytime soon might want to start thinking instead about what companies can do with all this near-free cash, and what record-low yields mean for equity risk premiums. The spread between earnings yields and bond yields is getting stretched like a piece of elastic. You can guess who wins and who loses when it finally snaps back.

Really explore the space with further Foolishness:

Fool contributor Jacob Roche is pretty proud of his own excellent credit rating. He owns calls on Johnson and Johnson. He also serves Motley Fool Options as a Community Fool. Johnson & Johnson is an Income Investor and Motley Fool Options recommendation, and Wal-Mart and Campbell Soup are Inside Value recommendations. The Motley Fool's disclosure policy has a quadruple-A rating.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Walmart Stock Quote
Walmart
WMT
$130.06 (-2.50%) $-3.33
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$245.95 (-0.80%) $-1.99
International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$122.71 (-2.08%) $-2.60
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$166.72 (0.33%) $0.54
Campbell Soup Company Stock Quote
Campbell Soup Company
CPB
$48.60 (-1.18%) $0.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.