An iLoss to Apple Inc. (AAPL) Bondholders

Page 1 of 2

A story in the news yesterday shows you how risky it can be to buy low-yielding bonds even if there’s no chance the company will fail to make the interest payments. The Financial Times reported yesterday that some bonds of consumer-electronics giant Apple Inc. (NASDAQ:AAPL) have fallen as much as 9% in their first six weeks of trading.  In case you happen to be an Apple bondholder – rest assured. Apple isn’t going out of business. The reason Apple’s bonds are down has nothing to do with the company itself. Apple is a very safe company. There’s virtually zero chance it will fail to repay its debts. It has $145 billion in cash and just $17 billion in debt.

Apple Inc. (AAPL)

The conventional explanation

Most people will point their fingers at the U.S dollar. A sudden weakening of the dollar will surely translate into a loss to dollar- denominated bonds. That’s Economics 101. Some people think it’s the sudden hike in the interest rate that’s beating down the price of bonds. Interest on a 10 year U.S backed notes jumped from 1.7% only a month ago, to 2.2% today. That’s a furious pace.

The real explanation

I believe that the main reason investors are now sitting on a 9% loss is that they simply paid too much for Apple Inc. (NASDAQ:AAPL)’s bonds, and the market is correcting that mistake.

Apple had zero debt until it sold $17 billion worth of bonds six weeks ago. They all had very low yields. The bonds that fell 9% were 30-year bonds that yielded 3.85%. That’s way too low for a 30-year bond. I bet investors who bought Apple’s low-yielding bonds thought it was OK they weren’t making much money because Apple Inc. (NASDAQ:AAPL)’s so safe, at least they wouldn’t lose any money. Now they’re sitting on a 9% loss. Again, there’s virtually no chance Apple will fail to repay its debts. But now, bondholders might have to wait 30 years to get their 9% back. These are the same folks who’ve been bidding up the U.S. Treasury market. These folks have been talking down the price of gold and gold-mining stocks. Even now, they are paying much more than par for dodgy U.S. corporate bonds. At their most recent peak, only a month ago, these bond lovers were paying, on average, an all-time-record price above par ($106 last month) for junk bonds. Remember… these pieces of paper are usually priced by the creditworthiness of the company that issues the debt and the likelihood of lower interest rates in the future.

Apple isn’t alone

It’s important to remember that Apple Inc. (NASDAQ:AAPL) didn’t need all that cash.  The company took it simply because it was offered to it at an incredibly cheap price. By issuing debt, Apple has joined other mega companies who benefited from this trend of bond buying. In May, Berkshire Hathaway Inc. (NYSE:BRK.A), whose cash hoard reached a record $49.1 billion in its first quarter, sold $500 million of 1.3%, five-year debt with a 57 basis-point spread and an equal portion of 4.3%, 30-year bonds with a relative yield of 135 basis points. Remember, Berkshire Hathaway Inc. (NYSE:BRK.A) doesn’t need all that cash – it took it because it could.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!