Stay Away From Corporate Bonds! The Coca-Cola Company (KO)

Page 1 of 2

Investors have been hoarding cash since the 2008 crisis. In Jan. 2013, for the seventh straight month in a row, mutual fund investors were net purchasers of fund assets, padding the coffers of bond funds with some $34.2 billion – for their strongest monthly net inflows in at least six years. Where did investors hide all that cash? Well, apparently in money market funds. Investors redeemed assets from money market funds at a furious pace of a net $4.8 billion.

Specifically, ETFs have now amassed more than $30 billion in junk bonds. Investors buy ETFs rather than directly buying bonds because they can do so faster and easier. They believe that these ETFs offer them more liquidity and diversification.

The Coca-Cola Company (NYSE:KO)The danger ahead

This race after anything that resembles yield has made bonds extremely expensive. Today, bonds held by these ETFs are already paying yields that are 2% lower than comparable bonds they don’t hold. That means, they’ve bid up the prices on the bonds they’ve been buying because there’s so little liquidity in that market. Average prices on junk bonds are now $105.60 – an all-time high.

You see, unlike stocks that theoretically don’t have any price cap, bonds can only offer investors the principle back plus a fixed interest. If bond prices are aggressively bid up, investors are bound to suffer capital losses later down the road. It’s an inevitable game.

Is this for real?

But junk bonds aren’t the only hot bonds out there. Corporate America was quick to recognize this sudden change in trend. If investors are so in love in bonds, then – why not give it to them at attractive prices? Various mega companies with a pile of cash on their balance sheets, strong earnings power, and a very deep business moat are taking advantage of this opportunity. These companies are now able to sell their bonds at absolutely ridiculous yields to investors hungry for yield.

International Business Machines Corp. (NYSE:IBM), for example, achieved a record low coupon of 0.55% when it issued $1.5 billion of bonds with a maturity of 3 years, back in February 2012. In May, IBM did it again. The company sold $600 million of 7 year notes with a coupon of 1.875%. Dealogic, the research group, said the sale was at the lowest rate for bonds of that maturity issued in dollars.

But IBM is not the sole player of this game. The Coca-Cola Company (NYSE:KO) was quick to join too. On March 9, 2012, Coke issued $1 billion of 3 year notes paying an annual coupon of 0.75%. A great bargain for Coke, of course. Investors paid through the nose and are sure to lose money year over year to inflation. As of now, Coke currently has total debt of $28.5 billion. Over the past five years, the total debt has increased by 306%.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

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!