Last month, financial experts Jeremy Siegel and Jeremy Schwartz declared the existence of “The Great American Bond Bubble” in a widely-read Wall Street Journal editorial. Their evidence for this fact through June, $232 billion had flowed out of equities while $559 billion had flowed into bonds -- pushing bond yields to ridiculous lows. The danger here is that if interest rates rise, investors in these ostensibly safe-but-low-yielding securities are going to be crushed.
And yet, investors continue to purchase bonds where the risk/reward profile is dramatically not in their favor. The latest example of this insanity comes from a Microsoft
That. Is. Silly.
While some will be shocked that this deal makes Microsoft almost as creditworthy as the U.S. government in the minds of investors (three-year Treasuries were recently yielding 0.68%), that’s actually not that unreasonable. While the U.S. government continues to drown in debt, Microsoft is sitting on a tidy net cash position of more than $30 billion.
No, the bigger story here is that investors are so worried about stocks, they’re willing to settle for an annual return of just 0.875% over the next three years in order to sleep soundly at night knowing their capital will be preserved. Why, however, wouldn’t they just buy shares of Microsoft stock? Shares, after the company’s recent dividend increase, now yield more than 2.5% annually, and the chance of this cash-rich blue chip going out of business sometime in the next three years is negligible. In other words, there’s almost no benefit to being a bond-holder instead of a stock-holder here.
Microsoft, though, has to be elated to take advantage of this craziness, and I expect the company to use the proceeds to increase the magnitude and pace of its share repurchase plan. Further, I suspect that fellow cash-rich tech giants Google
